February 25, 2021
Tax professionals are currently overwhelmed by a tidal wave of questions about the taxation of cryptomoney.
The recent surge in cryptomonries, especially Bitcoin which has increased in value by 50,000 in 10 years, the lack of return on savings and the COVID crisis which has offered free time to many have led many of us to invest in these financial products and, for some, to reap sumptuous results. Since nothing is ever too good, we need to consider whether these investments are taxable, and if so, at what rates and on what terms.
Investments in cryptomoney generate capital gains that can lead to three classic forms of taxation.
Private or professional management
The most favourable of these tax regimes, which is also the reason for Belgium’s reputation throughout the world, guarantees the absence of taxation on capital gains that are part of the normal management of private assets that a good family man would make of them.
The normal management of private assets is a residual concept enshrined in Article 90 of the Income Tax Code. It covers transactions that are not of a professional nature as well as those that can be qualified as abnormal.
The code has not simplified the life of practitioners, since it defines neither what are normal or abnormal operations nor what are really operations that have a professional dimension. It is therefore case law that has established a certain number of criteria for classifying these different notions within the different categories of taxes.
Among these criteria are the following:
Different tax rates possible
It is understood that the more these criteria are cumulatively met, the greater the chances of switching from the notion of normal management of private assets to that of miscellaneous income taxed at 33% or to that of professional income which is taxed at the progressive rate per bracket applicable to professional income (maximum 55%).
The investor in cryptomoney or his adviser will therefore have to carry out an analysis exercise to check that the investment falls within the framework of normal management and thus escapes taxation.
For example, the person, a doctor by profession, who inherits Bitcoins bought in 2013 by his parents who kept them without ever carrying out any other operation (stacking) and sells them in 2021, will be less likely to be taxed than the person who invests all his savings in Bitcoins at the end of 2020, sells them 4 months later, uses « bots » or « mines » and is also employed in a bank trading room in Brussels.
Taxpayers, before liquidating their accounts in cryptoskills, also have the possibility to question the tax authorities by means of an advance ruling. This procedure makes it possible to obtain a decision that is binding on the tax authorities on the taxation applicable to a particular transaction.
To this end, the Advance Rulings Service (SDA) has published on its website a list of 17 questions which help to determine the circumstances surrounding the transaction and which must be answered when submitting the request.
However, the ADS has already indicated that this type of investment does not constitute tax abuse within the meaning of Article 344 of the Code, which punishes behaviour aimed at evading tax, which, although formally complying with tax law, betrays its spirit, and also that such investments may form part of the normal management of private assets.
On the other hand, it is unlikely at this stage that the administration will take a favourable view of situations which involve the use of « bots » in « mining » or which concern operations in which the cryptomonnages are resold very quickly.
Lack of case law
It is understood that the ADS currently only responds favourably to extremely simple and unambitious requests (about ten decisions published to date). All of the decisions published concern investments in cryptomoney which correspond to a classic savings scheme, involving a reasonable investment in view of the taxpayer’s assets and which are held for a relatively long period of time. It is clear that in the absence of any case law decision on the issue to date, the administration will not conclude too quickly and easily that there is no taxation.
To our knowledge, there is as yet no clear directive obliging investors in cryptomoney to declare the existence of these accounts in their tax return (Box XIV, A) or to the central contact point of the NBB. However, the NBB has indicated on its website that accounts such as those registered with Paypal in Luxembourg only have to be declared if « the funds are not held on this foreign account beyond the time strictly necessary from a technical point of view for the execution of this transfer of funds ». The precautionary principle therefore leads us to advise to declare the existence of these accounts in the tax return since the period of holding on these accounts is, in principle, quite long.
Moreover, it seems essential to us to keep precise and complete documentation of all the operations carried out on your accounts in cryptomoney, both to provide proof of the legality of the origin of the cryptomoney to your bank when the accounts are liquidated, sometimes with significant capital gains, and to be able to justify oneself to the tax authorities in the event of an audit.
Indeed, the recent news reminds us that banks are now very fussy about the justification of the origin of the funds and do not hesitate to denounce to CTIF the movements they consider suspicious. It is therefore better to be well prepared for this unpleasant eventuality.