Cryptocurrency and taxation
Cryptocurrency is a hot topic at the moment and is becoming a mainstream way of paying for goods and services. With more people moving to buy crypto, a number of important questions arise that could affect even the casual crypto enthusiast. How is cryptocurrency taxed? Does one even need to pay tax when cryptocurrency is acquired anonymously? Luckily, the folks at Tax is Exciting have the answers to all your crypto questions.
Taxation worldwide assets
A Dutch tax resident is subject to tax on their worldwide income and assets. A Dutch tax resident is a person who has their central point of life in the Netherlands; nearly all people residing and working in the Netherlands are Dutch resident taxpayers.
The Dutch resident taxpayer reports their worldwide income and assets in their income tax return. To simplify the system, the Dutch government has created three boxes: box one, box two and box three. In the first box, you report your worldwide income and there are some minimal tax deduction possibilities. Box two is for taxpayers that own at least 5% shares in a company. Your worldwide assets are recorded in the third box.
Any assets valued on January 1 of the tax year are reported in the third box. Assets are worldwide bank accounts, so, your US bank account, for example, is also part of your Dutch income tax return. Worldwide properties you own also count towards your assets, although a tax credit is provided for foreign properties. Your assets are reduced with any possible debts you might have.
The property that is your home, your house, is not part of the worldwide asset taxation of box three. That house is in box one and could actually result in a tax credit due to the mortgage costs you can set off. Hence the mortgage on the house in box one is also reported in box one. This debt does not reduce your base in box three.
Where does cryptocurrency fit in?
A good question. Then again, we think any question about tax is an exciting question. Cryptocurrency is recorded in box three and, like your foreign currency bank account, the cryptocurrency is reported as per its value on January 1.
However, any profit you have made while trading in cryptocurrencies could be taxed in box one. It is either recorded in box one or box three, you cannot be taxed during a tax year in both boxes for the same.
When are you to be taxed in box one? The moment you try to create a profit with cryptocurrency can be seen as work. If you trade all day every day in crypto and you have generated a profit, then the actual profit is taxed in box one and the value of the currency is no longer taxed in box three.
There is no line you need to cross to move from box three to box one. It is a grey area like the shared portfolio holder that trades and makes a profit. Very fact-driven.
Who knows that I have cryptocurrency?
We are often asked: “Who knows that I hold cryptocurrency?” And, “Why report something nobody knows about?” The cryptocurrency is an international coin. In international situations, the Dutch tax office has the right to go back in time 12 years. The question is, will you cash your currencies in the next 12 years? If so, the Dutch tax office can go back and charge you.
To put it differently, what is the point of holding cryptocurrencies if you can never use them? If you want to purchase a fancy car or a house with an amount you cannot explain, you will quickly have tax issues. The answer to the above question is that governments, over time, will know you hold cryptocurrency.
What is the penalty for not reporting your (entire) assets?
The tax office will have you file your income tax return for the current year. You can even update your income tax return for the previous year. However, if you have not reported your assets for over two years, and the tax office comes to that conclusion, the penalty is 300 percent of the wealth tax due over these assets. The tax office can be alerted by one of the 150 countries the Dutch tax office has treaties with to actively share information of their tax residents.
Got any tax questions? The folks at Tax is Exciting think tax is just as exciting as watching your crypto values skyrocket so, if you have any questions or need any help regarding tax, don’t hesitate to get in touch.