Taxation of Cryptocurrencies in Dutch Income Tax
The use of cryptocurrencies for investment and payment purposes is increasing worldwide, and more people find cryptocurrencies an attractive alternative for regular investments. Either for risk diversification or to increase the rate of return on their investment portfolios. Some individuals or groups may even decide to become their own “Central Bank” and issue their own developed crypto coins to interested parties. Depending on the coin’s popularity, i.e. demand, the price will increase, and hence the value of the issued coin increases.
Most individuals will simply buy and sell cryptocurrencies or start their own mining operation with a few servers. Some companies working in the cryptocurrency sector will pay their employees or contractors (partly) with cryptocurrencies for services rendered. In that case, the use of cryptocurrencies is simply a substitute for any regular government-issued currency.
The various activities, together with facts and circumstances of the specific activity in which cryptocurrencies are used to determine how the use of cryptocurrency is taxed in the Dutch income tax system.
To better understand the taxation of cryptocurrencies, we will summarize the taxation of box 1 (income from housing and employment) and box 3 (income from savings and investments) below. Box 2 (income from a substantial interest, i.e. owning 5% or more of the shares in corporation) will not be discussed.
Each box has its own applicable tax rate.
Income from employment and housing (box 1)
Box 1 taxes income from (past) employment, periodical payments, housing, and residual income.
Income in box 1 may be reduced by applying the applicable deductions such as the mortgage interest deduction and other deductions, i.e. alimony payments, health care costs, and life insurance contributions.
The income is taxed using the brackets and rates as stated below. The tax liability may be reduced by applying various tax credits.
The 2022 rates are as follows and include social security contributions
|Tax Bracket||Tax rate|
|€ 1 to € 69.399||37.07% including 27.65% social security|
Income from savings and investments (box 3)
The net value of your worldwide savings and investments is taxable in The Netherlands. The net value is defined as assets minus liabilities. Please note that your primary mortgage liabilities are not treated as a liability for box 3. The Dutch tax authorities will apply a deemed rate of return on the value of your net assets on 1 January of each year. The deemed rate of return is taxed at a rate of 31%.
As a deemed rate of return is used, The Netherlands will not tax the actual income from savings and investments such as stocks, bonds, interest, and rental income. Nor will the Netherlands tax any capital gains related to income from savings and investments.
The 2022 deemed rates of return are as follows:
|Brackets value of savings and investments||Deemed return on savings and investments||Effective tax payable on deemed rate of return with tax rate of 31%|
|€ 0 – € 50.651||1,818% (tax exemption)||0,653%|
|€ 50.651 – € 962.351||4,366%||1,353%|
Please note that the exemption for savings and investments of € 50.651 is doubled to €101.302 jointly for fiscal partners.
If you have been granted the 30% ruling, you may elect the partial non-resident taxpayer status, thereby exempting you from box 3 taxation with except for of Dutch property. Therefore, if any activity with or using cryptocurrencies is classified as box 3 income, the activity is tax-exempt.
Taxable activities using cryptocurrencies
Several activities with cryptocurrencies may generate income. Depending on the facts and circumstances, taxation of the income will occur in either in box 1 or box 3.
An individual may trade cryptocurrencies. Passive trading is taxed as income from savings and investments in box 3. If an individual has been granted the 30% ruling, electing the partial non-resident taxpayer status will exempt the cryptocurrencies from box 3 taxation.
Active trading is taxed in box 1 as residual income and taxed at progressive tax rates. Costs related to trading activities are tax-deductible.
Obviously, determining the difference between active and passive trading is crucial. The Dutch authorities do not work with a list of criteria that can be checked in order to determine if the crypto is taxed as savings and investments or as income from housing and employment.
The difference between active and passive trading depends on, amongst others, income earned, time spent on the trading activity, the amount of work/research done in order to trade, and if any monetary investments have been made.
In addition, to qualify as a source of income, two conditions have to be met:
- aiming for profit and;
- the reasonable expectation of profit.
If structurally positive results are achieved that can be explained by performing work that goes beyond speculation, then it does qualify as a source of income. This has to be assessed on a case-by-case basis.”
If the mining activity constitutes income from housing and employment, it may be better to set up a BV in order to lower the tax liability as this avoids paying progressive rates with a top tax rate of 49,5%.
ExpatTaxes would be happy to help you assess your trading activities as the consequences may be significant.
Airdrops are free tokens provided to the beneficiary. It’s basically free crypto used for promotion to generate new users and followers. Taxation depends on the circumstances, i.e. whether the beneficiary is an investor, an employee, or a service provider to the company distributing the airdrops.
It involves lending or staking your cryptocurrency coins or tokens to get rewards in transaction fees or interest. This is somewhat similar to earning interest from a bank account; you technically lend money to the bank.
As a passive activity, such as buying bonds as Yield Farming are usually taxed in box 3 as income from savings and investments.
Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions. Staking, therefore, does not require any regular activity and is rather passive. Staking is consequently taxed in box 3 as income from savings and investments.
Determining the tax consequences of cryptocurrencies is not always as easy classifying income as income from employment and housing (box 1) or income from savings and investments (box 3), depends on whether the individual is an active or passive investor. Further complicating things is that sometimes classification depends on the nature of the source of income, i.e is it income from employment, bonus, freelance income or is it one of the activities discussed above.
For individuals who have been granted the 30% ruling classification of the cryptocurrency activity as income from savings and investments would mean exemption from taxation as the partial non-resident taxpayer status may be elected in the income tax return.
For individuals who are active investors, such as miners or heavy traders, the activity is taxed at progressive rates in box 1. These progressive rates may be avoided by trading through a BV, depending on the situation.
ExpatTaxes would be happy to help you navigate the stormy waters of cryptocurrency taxation in The Netherlands.