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Expertise

Crypto

Crypto and tax are an exciting combination. The advent of cryptos is having an increasing impact on taxation. For instance, how to process crypto in a tax return and/or how to voluntarily disclose cryptocurrency assets are questions that are coming up more and more frequently. Practical experience and relevant technical knowledge of crypto is essential in disputes with the Tax and Customs Administration on matters such as cryptocurrency valuation.

Hertoghs advocaten has built up years of experience in tax litigation and has closely followed developments regarding cryptocurrency assets from the outset. We provide assistance on supplementing returns to declare cryptocurrencies, questions from the Tax and Customs Administration on cryptocurrencies not reported in a tax return and disputes with it as to the tax classification and valuation of cryptocurrencies, including with regard to the Box 3 levy on cryptocurrencies.

We also provide courses on cryptocurrency and taxation for tax consultants and associated parties. Where necessary, we cooperate with our network of professional crypto-asset service providers, for example in tracing assets.

Whether this involves bitcoins, mining, strikes, tokens such as NFTs, government-issued (or yet to be issued) CBDCs, implications of smart contracts or the tax domiciles of DAOs, tax case law on digital assets and blockchain-based smart contracts is developing and changing at lightning speed.

Crypto information exchange under DAC8

Around 2 million (link in Dutch) Dutch citizens own cryptocurrencies. The Tax and Customs Administration knows that, too. Studies show that only 1.5% of taxpayers reportedly declare crypto assets to the Tax and Customs Administration. The EU DAC8 Directive is intended to change that.

Its aim is to promote cooperation between Member States and combat tax fraud, tax evasion and tax avoidance. Specifically, from 1 January 2026, all European crypto-asset service providers subject to reporting obligations will be legally required to provide annual information to their own tax authorities, which will then be shared among the other EU Member States. In the Netherlands, this will be incorporated into the International Assistance (Levying of Tax) Act (Wet op de internationale bijstandsverlening bij de heffing van belastingen ("WIB")). The system is derived from the Common Reporting Standard (CRS) and the Crypto-Asset Reporting Framework (CARF) drawn up by the OECD. The information to be reported includes personal data (name, Member State address, tax identification number, place and date of birth), the name of and type of crypto asset, the total gross amount paid or received, the units and buying and selling transactions against fiat currency, the fair market value and the total number of units of transfers to distributed ledger addresses.

Information on the year 2026 will most likely have to be reported in 2027. The reported data could potentially be used for the pre-completed declaration (vooraf ingevulde aangifte ("VIA")) in the Netherlands. Tax could then be due, depending on the tax-free assets reported in Box 3. However, past ownership is also relevant. The Tax and Customs Administration may send enquiry letters and conduct its own investigations into past crypto ownership. It will also investigate the origin of the assets. These enquiry letters often lead to disputes with the Tax and Customs Administration, as the requests for information are often very far-reaching. In certain circumstances, the Tax and Customs Administration may request data for the past 12 years and levy tax on any income or assets accrued abroad during that period. As regards cryptocurrency, it will not always be easy to determine whether the 12-year period applies as current legislation is not designed for that. We can then explain that based on the specific situation.

Voluntary correction of a tax return

One possibility is to act now rather than awaiting the introduction of DAC8. This can be done by submitting a voluntary correction to the Tax and Customs Administration. A voluntary correction (of a tax return) is an extenuating circumstance that provides grounds for mitigation of any criminal penalty to be imposed.

According to a recently published internal memo to the Tax and Customs Administration. A voluntary correction (of a tax return) is an extenuating circumstance that provides grounds for mitigation of any criminal penalty to be imposed.

In short, it may pay to now voluntarily correct any returns already filed, well before the implementation of DAC8. You can discuss this possibility with our attorneys. Read more on our expertise page entitled Foreign assets and voluntary disclosure.

Markets in Crypto-Assets Regulation (MiCA)

The Council of the European Union and the European Parliament recently adopted the Markets in Crypto-Assets Regulation ("MiCA"). Its aim is to harmonise regulations for crypto-asset service providers throughout the EU, thus creating a level playing field. There are also voices calling for the introduction of a "travel rule", which would require crypto-asset service providers to identify both the sender and recipient in any transaction. This would to a certain extent make transactions with anonymous non-custodial wallets (under own management) a thing of the past.

When converting your non-custodial cryptocurrency to a fiat currency, exchanges as well as platforms and crypto-asset managers appreciate the fact that there is proof that the cryptocurrency has been declared to the Tax and Customs Administration. Our attorneys can guide you through the tax regularisation of non-custodial crypto assets.

Cryptocurrency and VAT

In 2015, the CJEU ruled inHedqvistthat exchanging traditional currencies for bitcoins and vice versa in return for payment (including a profit margin for the bitcoin trader) are "services for consideration". These services were, in principle, subject to VAT, but, according to the CJEU, fell under the exemption for transactions concerning "currency, bank notes and coins used as legal tender". In 2024, one may question whether this explanation is still correct in light of the objectives and context of the VAT exemption. Bitcoin is widely seen (apart from the lightning network) as an asset/investment, not a means of payment.

The District Court of The Hague (link in Dutch) ruled in 2021 that bitcoin mining constitutes an economic service. There is supposedly a direct link between mining and the transaction fee. The District Court ruled that no distinction should be made between, on the one hand, activities aimed at validating and authenticating transactions in bitcoins and, on the other hand, mining blocks. To determine the extent of the right to deduct input tax, the interested party had to make a plausible argument demonstrating the proportion of customers located outside the EU. As no "appropriate evidence" was produced, the District Court made its own informed estimate of the number of customers involved.

Now, in 2024, we consider that a cryptocurrency owner's or miner's evidentiary position in similar cases has already greatly improved, thanks in part to blockchain analytics.

Cryptocurrency and Box 3

According to the Tax and Customs Administration, under Section 5.3(2)(f) of the Income Tax Act (Wet op de inkomstenbelasting) 2001, the value of cryptocurrencies such as Bitcoin should, in a nutshell, be declared as assets in Box 3 (other proprietary rights, the residual category, link in Dutch), unless it is declared as a Result from Other Activities (ROW) or Operating Profit in Box 1. Under Section 5.2 in conjunction with Section 5.3 of that Act, assets must be valued at fair value on the reference date of 1 January. It could then still be difficult to determine the value on the reference date of 1 January because that information is not always available. That data can be retained by recording the value on 1 January each year, e.g. using a screenprint from a recognised exchange.

Since the Dutch Supreme Court's 2021 Christmas ruling (Kerstarrest) (link in Dutch) and the Box 3 Legal Redress Act (Wet rechtsherstel Box 3), it has not been easy to determine the taxation of crypto. Over the years, the value of crypto assets can fluctuate wildly from one Box 3 assessment date to the next, with the added problem that without withdrawals and with truly negative returns, there is no fiat currency in cash or available for paying capital tax. Recently, the District Court of Noord-Holland (link in Dutch) ruled in such a case that the taxation in Box 3 was so far removed from a reasonable approximation of the actual returns that, even taking into account the Box 3 Legal Redress Act, the levy could not pass the fair balance test of Article 1 of Protocol No. 1 to the ECHR in conjunction with Article 14 of the ECHR, and to that extent should be disapplied. The District Court measured the return on the cryptocurrency at zero, as it had in fact yielded a negative return.

Box 1 or Box 3

For loss-making cryptocurrency activities, Box 1 may be more favourable than a levy in Box 3. A loss in Box 1 can be offset against positive Box 1 income over the 3 previous years and against positive Box 1 income over the 9 subsequent years. In 2022, the District Court of Gelderland (link in Dutch) ruled that a crypto trading bot had no objective expectation of benefit and therefore no source of income in Box 1 (operating profit). Price results of cryptocurrency transactions carried out by that crypto trading bot were thus not part of the taxable profit. A key source condition was not met. The labour involved in programming and running the trading bot was linked to pure speculation. The result consisted of price gains and losses, not the alleged "market imperfections" that the trading bot was supposedly able to exploit. The bot had no influence on these speculative price movements. When using a simple, purchased Bitcoin or Satoshi Trading Bot, the "additional" labour is often limited to creating and linking API keys to the crypto trading platforms.

This decision - albeit from a lower court - seems to be an indication that returns generated by trading bots are not taxed at the progressive rates of Box 1. The lower tax burden in Box 3 would appear to be favourable, but this is offset by the fact that losses are not offsettable as they are in Box 1.

Furthermore, it remains to be seen whether this case law will hold for more complex bots, where the returns exceed simple price fluctuations and can actually be related to the programming work.

Forks and Box 3

Put simply, a fork, such as Bitcoin Cash, is a new offshoot of an existing blockchain of a cryptocurrency. In a cryptocurrency fork, holders of the original currency also get the new coins, accessed using the same private key. Claiming these new coins after a fork can be risky due to the possible inadvertent transmission of original coins, unless protection against "replay attacks" is built into the source code. The Tax and Customs Administration argues that these risks associated with claiming forked crypto coins are simply inherent to owning cryptocurrencies. Even if an owner does not claim the forked coins for fear of these risks, they must declare ownership in Box 3. The fact is that, in theory, the owner could still claim them years later, according to the Tax and Customs Administration.

There are other details to note. Most private crypto owners use an online wallet, which could be on their smartphones, at an online exchange (trading platform). They do not have access to the private key themselves. This key to crypto ownership (and the new fork) is actually managed by the exchange in the online wallet. In practice, an online exchange or service provider may decide not to support crypto coins created from a hard fork. In that case, the Tax and Customs Administration recognises that the taxpayer will not be able to use the crypto coins created, making it unreasonable to take this value into account in Box 3. In that case, however, the taxpayer must make their own plausible case that they will never be able to use the forked coins.

Asset tracing / source of funds

A dispute could arise with the Tax and Customs Administration, the bank or a crypto asset manager about the origin of cryptocurrency assets. Taxpayers often find themselves in a difficult position in this regard. For example, the exchange or platform where the cryptocurrency assets were once purchased or traded is bankrupt and has disappeared without trace. If non-custodial (hardware) wallets were used, it can be difficult to demonstrate the subsequent ownership of the cryptocurrency. If in the distant past cryptocurrency had been self-generated using a mining pool or ASICs, physical evidence or digital accounts would often have been lost a long time ago. We work with reputable partners who produce forensic blockchain analyses and tracking reports. We use this evidence in tax proceedings at the Tax and Customs Administration and in onboarding/KYC procedures of financial institutions, accountants and tax consultancy firms to clarify the source of wealth for external parties.

NFTs, DAOs, ICOs, DeFi

Many tax issues involving cryptocurrency are far from having been properly clarified. The tax domicile of a DeFi organisation run entirely online by token smart contracts on a blockchain, known as the Decentralised Autonomous Organisation (DAO), is a black box. It is unclear whether this DAO qualifies as an "entity" (lichaam) within the meaning of Section 4 of the State Taxes Act (Algemene wet inzake rijksbelastingen ("AWR")). It might possibly be aligned with our concept of a cooperative or simply with the tax domicile of some of the participants who hold majority control/voting rights. smart contracts (link in Dutch) on a blockchain, known as the Decentralised Autonomous Organisation (DAO) (link in Dutch), is a black box. It is unclear whether this DAO qualifies as an "entity" (lichaam) within the meaning of Section 4 of the State Taxes Act (Algemene wet inzake rijksbelastingen ("AWR")). It might possibly be aligned with our concept of a cooperative or simply with the tax domicile of some of the participants who hold majority control/voting rights.

We also foresee future disputes about gift tax as a result of ICOs and airdrops(links in Dutch). An interesting point is whether owners of NFTs can take advantage of the many special tax facilities available for art, such as the inheritance tax remission scheme for art bequests (Section 67 of the Inheritance Tax Act (Successiewet ("Sw")) or the exemption for objects of art and science (Section 5.8 of the Income Tax Act).

Our attorneys are trailblazers in the area where these cutting-edge cryptocurrency applications and taxation meet and therefore monitor the developments closely.

 

 In a nutshell

Crypto information exchange

Voluntary disclosure

Markets in Crypto-Assets Regulation

Crypto and VAT

Crypto and Box 3

Forks and Box 3

Asset tracing/source of funds

NFTs, DAOs, ICOs, DeFi

 

 

Contact our specialists

A.J.C. (Angelique) Perdaems

R.J. (Reinder) de Jong

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