Are cryptocurrency capital gains to be declared as taxable income?

1. Three possible tax qualifications

There is (still) uncertainty regarding the tax treatment of cryptocurrency capital gains. This mostly concerns the tax treatment of capital gains that can be realised on the sale or conversion of cryptocurrency. 

If such capital gains are realised by an individual, three possible tax qualifications are conceivable: 

• capital gains may qualify as income from business activity that is generally subject to progressive tax rates, additional municipal tax and social security contributions; 
• capital gains may qualify as miscellaneous income, taxable at a rate of 33% and subject to the additional municipal tax;
• capital gains may be exempt from tax. 

Although this ambiguity has existed for some time, there are as yet no specific tax rules on the basis of which the qualification of this income can be unambiguously delineated. The only way to get legal certainty on this qualification is through a ruling application of the Office for Advance Tax Rulings.

Based on the now-published advance tax rulings, an overview can be given of the circumstances that - according to the Office for Advance Tax Rulings - may give rise to exempt, miscellaneous or professional income.

This allows a taxpayer to assess his/her own situation (for the past) or organise it (for the future) so that he/she can try to assess his/her tax liabilities.

1.1 Income exempt from tax

The vast majority of published advance tax rulings qualify realised capital gains as income exempt from tax. From the specific circumstances, this requires an extremely prudent and passive investor who:

• came into possession of cryptocurrency via a personal investment or via an inheritance and consequently did not borrow to purchase his crypto coins;
• invested in cryptocurrency several years ago for a total amount not exceeding 25% of his movable assets;
• made only a limited number of purchases, e.g. an average of 1-2 transactions per month for several years;
• then applies a ‘buy and hold’ strategy, i.e. holding the coins for a long period of time and therefore has no real investment strategy (even if active on a crypto exchange for less than one year);
• does not engage in mining; 
• does not bye or sell via an automated process or via automated software; 
• is not active in the technology sector or - if he would be active in the technology sector - does not carry out any activities in the cryptocurrency sector, as a result of which he never professionally came into contact with cryptocurrency;
• has not invested in a cryptocurrency saving fund;
• is not active on forums or through blogs in the cryptocurrency community;
• at most occasionally follows crypto exchange rates as wel as other financial markets;
• ideally (but not necessarily) uses a paper or hardware wallet to store his crypto coins (the use of special equipment to protect his crypto coins is encouraged); 
• does not invest in cryptocurrency on behalf of other persons;
• does not rely on the advice of financial and/or IT professionals for his investments in cryptocurrency or only at most within the framework of complying with his tax obligations.

The taxpayer who meets these criteria can be deemed to have realised purely income exempt from tax. 

1.2 Miscellaneous income

Only a handful of published advance tax rulings qualify the capital gains realised as miscellaneous income. The specific circumstances show that this requires an investor who does not fully meet the above criteria, but exhibits at least one of the following conditions: 

• buys or sells through an automated process or through automated software that - if developed by the taxpayer itself - is not commercialised by the taxpayer;
• uses an active/day trading (taking advantage of smaller short-term price increases in order to realise capital gains) or scalping (holding a position only for a very short - a few minutes - period) strategy;
• has more than 25% of its movable assets invested in crypto currencies;
• has a recurring monthly investment in crypto coins of more than 3
  a recurring monthly investment in crypto currencies of more than 30% of the applicant's salary (without the ratio to total moveable assets appearing to have been verified by the DVB);
• the accumulated crypto portfolio serves as collateral for trading crypto securities;
• obtains interest on the capital of its crypto currencies.

As soon as a taxpayer meets any of these criteria, he/she will - at least according to the Office for Advance Tax Rulings - be deemed to have realised miscellaneous income.

In addition, the 2021 Annual Report also mentions an investment of around 25% of the applicant's movable assets in cryptocurrencies (i.e. below the aforementioned 25% limit) combined with the realisation of capital gains on cryptocurrency that was held by the applicant for only 2 months. In these circumstances, the Office for Advance Tax Rulings also held that a qualification as miscellaneous income should be withheld.

1.3 Income from business activity

No published advance tax ruling qualifies the capital gains as income from business activity. The 2020 Annual Report of  the Office for Advance Tax Rulings reports one advance tax ruling application where the Office held that there is income from business activity in the following circumstances:

• the applicant had started mining cryptocurrency some 10 years ago, over a number of years, which  the Office considered to be regarded as an active, constant pursuit of an activity with the aim of acquiring crypto coins;
• recently, the applicant had started selling some of these crypto coins on a monthly basis;
• the applicant was active in the IT sector (it can be presumed that the applicant was specifically active in the cryptocurrency sector and therefore already professionally in contact with cryptocurrencies).

The applicant evidently disagreed with  the advance tax ruling of the Office for Advance Tax Rulings and consequently withdrew its advance tax ruling application.

The applicant's dissatisfaction can be endorsed.

First of all, it remains to be seen whether cryptocurrency mining (particularly some 10 years ago) should indeed be considered an active, constant follow-up activity. If this were the case, at most the activity of mining could be considered a professional activity. The income received from it (being the crypto coins), if any, would have to be considered as income from business activity at the value at the time of its receipt.

If  the income from business activity (being the cryptocurrencies) is subsequently held for an extended period (cf. ‘buy and hold’ strategy), the resulting capital gains - based on the advance tax rulings cited above - may be deemed to be income exempt from tax.  

The 2022 annual report of the Office for Advance Tax Rulings again mentions qualification as income from business activity. Again, considering all the elements of the case (mining, related professional activity, repurchase of cryptocurrencies owned by a proprietary company on advantageous terms, number of transactions, vagueness around certain transactions, etc.), the Office for Advance Tax Rulings considers that a qualification asincome from business activity should be considered.

2. Conclusion

The opinion of the Office for Advance Tax Rulings can be used as a guide, but for the record, it is not binding. Accordingly, a taxpayer who has invested more than 25% of his movable assets in crypto currencies, but also has substantial real assets, does not necessarily have to acquiesce to the Ruling Offices opinion that the capital gains realised by him are taxable as miscellaneous income anyway.

Would you like to receive more information or be assisted by the specialists of Andersen in Belgium (formerly Seeds of Law)? Please do not hesitate to contact us at +32 (0)2 747 40 07 or at info@be.Andersen.com.