Crypto currency is hot now the Bitcoin went through the roof and bank manager are eager to state that they are not concerned by this development, hence a crypto currency and taxation followup.
Where crypto currency was very much linked to internet criminals hacking your computer and if you paid in crypto currency they would unhack. Now the regular Joe the plumper takes his chances in this wild wild west part of financial trading. Many tax questions are asked. Two I would like to address, taxation and reporting obligation.
Crypto currency and taxation – the gain
The world became obvious of the gains to be made with crypto currency around Christmas 2017 when the bitcoin peaked at about EUR 19.000. So did other crypto currencies as well. We have been informed that some crypto currencies went from no value to EUR 84.000 to EUR 500.000.
The Dutch tax office is also very keen on this development I can only assume. The reason is twofold, both wealth tax but also regular tax rates due to labour performed to achieve the gain.
How does that work?
Crypto currency and taxation – regular tax rates applicable
The moment you trade in such a manner that you make a substantial amount of gain by focusing on the crypto currency you have and buy and sell to the best of your ability. You do that actively, more than a couple of times per year. If that is the case, you exceed the normal activities done for a Box 3 taxation (about 1.2% over the economic value) portfolio. The labour done, even maybe not experience by yourself as such, makes the income subject to Box 1 taxation. In Box 1 the tax rates vary from about 37% to about 52%.
Crypto currency and taxation – Box 3 wealth tax rates applicable
When you hold crypto currencies and over the period of a calendar year you make a small number of transactions and your gain is basically yielded by the currency value going up, you are a genuine Box 3 wealth tax payer. That implies on January 1 of a tax year the economic value of the currency is taxed at about 1.2%, but the gain made is not separately taxed with Box 1 tax rates.
Crypto currency and taxation – Reporting obligation
During the meetings we have had with crypto currency owners the general tone of the meeting is that nobody knows, can know and will know that they hold the crypto currency. So why would they expose themselves to the Dutch tax office.
For us there are a couple reasons, one of them is that in the Netherlands we have rules and regulations. One of them is that you need to pay income tax in accordance with the regulations that apply. Simple as that. If you do not want to comply, you should not want to be a Dutch resident tax payer. Please keep in mind, the fact that the Netherlands is such a favorable country for the internet activities is also caused by the Government and the Government is financed by the tax being paid.
Another reason, which I think is one you need to be aware of is the fact that the Dutch tax office has normally 5 year time period to go back to you and collect the tax. For instance, it is now 2018, the tax office can collect tax from you over the years 2013-2017, if you filed no tax return or a wrong tax return. The 5 year period is extended to a 12 year period when foreign assets or foreign income is involved. Simply for the reason that obtaining information from abroad is more time consuming. My question to Crypto currency holders is then that they still think the tax office will not know in 2029 about the currency they held in 2017? The immediate answer we then receive is basically an insult to the developing intelligence industry in which the Dutch tax office is very active.
That said, we more or less expected such answer. So then we ask, what is the point of having so much value in crypto currency, that you hide for taxation? One day you would like to spend the money and the way the currency value goes up like it does, chance is you purchase something that will be noticed. The logical thing that happens then is that you are being asked how you were able to pay for what you purchased.
We are not afraid to assist crypto currency holders, if we are explained with which funds earned from where the currency was obtained, we can assist the tax payer, if all legal of course. We also have the opinion we can only assist you if you are willing to comply with the rules, regardless of anybody being able to allocate a currency to that tax payer. In the long run you will experience that paying the tax makes it possible to enjoy the yield in freedom.