Taxation Of Crypto Assets And Cryptocurrencies: Time For Action – Technology

Over the past few years, we have come across many clients in the
crypto sector. With experience, it has become allot easier to
ascertain the tax implications of each token and (crypto) business
model. However, considering the fact the first Bitcoin was minted
in 2003 and the first ICO occurred in 2013, the lack of legislation
or guidance from tax authorities is remarkable.

On 18 January 2022 Pepijn Pinkse, senior tax lawyer and
member of the FinTech team at Loyens & Loeff in Amsterdam,
spoke at the 11th Annual IBA Finance & Capital Markets Tax
Virtual Conference as part of a panel of crypto tax experts. This
article gives an insight into the topics discussed.

One of the biggest frustrations for (tax) lawyers advising
clients in the crypto sector is the complete lack of legislation or
comprehensive guidance from tax authorities. While local
authorities have yet to make a start implementing legislation
relating to cryptocurrencies (such as Bitcoin), the crypto sector
has developed so fast in the last few years that even cryptographic
experts (let alone lawyers or tax inspectors) struggle to keep up.
How will tax authorities ever catch up?

In the Netherlands, the last official communication on the
taxation of crypto assets was on 8 March 2018. In a letter (Dutch only), the State Secretary of
Finance – in short – indicated that he deemed cryptocurrencies a
form of material assets and not liquid assets (note that
the letter only identifies cryptocurrencies and not the
broader range of crypto assets). The consequence being that from a
Dutch tax perspective, no special tax treatment is given to
cryptocurrencies. One simply has to imagine they are, let’s
say, a piece of gold and try to draw any conclusions on taxation
from that. Some examples include personal income tax (having
cryptocurrencies as part of your net wealth), wage tax (receiving
wages in cryptocurrencies), corporation tax (entering
cryptocurrencies onto the balance sheet) or generating business
profits (whether as a company or individual) from mining
activities.

While this does seem a bit meager in terms of guidance for the
whole range of crypto assets, in many instances it is very useful
for taxpayers to know that they can treat cryptocurrencies as
material assets. For example, because they are allowed to value any
cryptocurrencies they hold at cost price. A quick glance at (for
example) the Bitcoin historic price graph shows that this can save
taxpayers allot of hassle and (potentially) taxes.

However, cryptocurrencies are in fact the most simple form of
use of crypto assets. What to think of the multiple forms of
financing with crypto assets. Many will have heard of the term
Initial Coin Offering (ICO). The grandfather of crypto financing
dating back to 2013. As can be judged from the high amount of scams
and outright failures, the mechanism was flawed in many ways. This
has led to various other forms of offerings during the past half
decade. It goes beyond the scope of this article to detail them
all, but mention must be made of Security Token Offerings (STOs),
Initial Exchange Offerings (IEOs) or their decentralized
counterpart: Initial Decentralised Exchange Offerings (IDOs) or
even DAICOs.

It will not come as a surprise that the tax treatment of such
financing transactions is not governed by specific legislation. As
a small consolidation, some interesting
information (Dutch only) has recently become available as a
result of a request under the Government Information Act (WOB). A
majority of the documents relate to the VAT treatment of various
cryptocurrency businesses (such as mining, trading or exchanging).
However, one document sheds some light on the corporation tax
treatment of ICOs. The document reveals the internal standpoint of
the Dutch tax authorities, that they will allow a tax provision for
(some) future expenses to be taken into account in case a utility
token is offered through an ICO. Something which, by the way, was
already much explored by taxpayers.

While it is encouraging to see that the Dutch tax authorities
have given some thought to the taxation of crypto assets, they are
still scratching the surface of the tax issues relating to crypto
assets. What do the Dutch tax authorities consider a utility token?
And what is the tax treatment if it does not qualify as a utility
token but is more akin to a security? For which expenses could a
provision be entered into the books? What is the VAT treatment of
an ICO? And what about the other forms of token offerings?

It is apparent that allot (that is not to say: most) of the
questions in the field of taxation of crypto assets still needs to
be answered. And new and even more complex questions are arising,
for example with regard to Decentralised Autonomous Organisations
(DAOs) and Decentralised Financing (DeFi), as the question
complexifies from how taxation should occur to
who (which jurisdictions) is allowed to tax?

Although tax advisers are well equipped to come up with creative
solutions, it would be a big step upwards for all taxpayers
operating in the crypto sector if allot more of the uncertainty
surrounding the tax treatment of crypto assets would be taken away
by legislation and comprehensive guidance on a short term
basis.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.