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The increasing popularity and global growth of cryptocurrencies have resulted in questions regarding the regulatory status of this novel financial phenomenon. Cryptocurrencies are entirely virtual and organized via a network called a blockchain. This is a register keeping secure records of all completed transactions. The blockchain is practically controlled by no one, as it is distributed across all computers with Bitcoin wallets. Therefore there isn’t a single institution that manages the network. Logically this implies the presence of various legal and financial risks.

Cryptocurrency start-ups raise early funds by using the so-called Initial Coin Offering (ICO). In an ICO campaign a company sells digital coins publically to finance its operations and achieve other business goals. ICOs are currently unregulated by governmental agencies or law. The lack of statutory framework has been a matter of concern due to the considerable potential risk assumed by the investors. Consequently, volatility has also become an issue. Unfortunately, investors losing funds in this process have no standard options for recovery of the amounts.

Virtual currencies and the EU

The risks inherent to virtual currency use have prompted the EU institutions to adopt regulations. Still, regulation at the EU level is complicated because of the developing EU statutory frameworks and the inconsistencies across the Member States (MS).

Cryptocurrencies remain unregulated at the level of the European Union and without close supervision by public authorities. Nevertheless, the participation in virtual currency schemes may lead to liquidity, credit, and legal and operational risks. Therefore MS authorities should decide whether to accept or, alternatively, regulate and formalize virtual currencies.

Cryptocurrencies in Holland

The national Act on Financial Supervision (AFS) states that electronic currencies are monetary values stored magnetically or electronically. Their intended use is to perform transactions and they are accepted as payment by parties different from the party issuing the money. Cryptocurrencies, however, do not match the definition of electronic money, since they do not meet all statutory criteria. This begs the question how exactly to define them.  In the framework of the AFS a virtual currency is just an exchange medium. Individuals are free to perform barter trade and no legal permission (license) is required. The Finance Minister expressed an opinion that it is not advisable, at least up to this point, to revise the existing definition of e-money, considering the comparatively low acceptance level, restricted scope and limited economic importance of bitcoins. He pointed out that only consumers carry the responsibility for cryptocurrency use.

The District Court of Overijssel and the Finance Minister of the Netherlands accept virtual currencies, e.g. Bitcoin, as exchange media. In an appeal procedure, the Dutch Court acknowledged that bitcoins qualify as objects for sale by virtue of Art. 7:36 of the Dutch Civil Code. It also concluded that virtual currencies can be considered as exchange media, but they do not satisfy the criteria for legal tender. On the other hand, the Court of Justice of the European Union (CJEU) ruled that cryptocurrencies should be perceived as a means of payment, thus suggesting indirectly that they are comparable with legal tender.

Read here for information on bitcoin and tax

Conclusions

The issue of cryptocurrency regulation proves to be quite complex and the CJEU will likely need to go into terminology clarification. Any MS choosing to adopt terminology different from the legislation of the EU may thus cause difficulties with law interpretation on the background of the European Union legislation. Having this in mind it is recommended that MS follow the terminology of the common EU legislation while amending their national laws.

In case you are planning to start a cryptocurrency business in the Netherlands, do not hesitate to get in touch with our team. They will give you more information on the situation with cryptocurrencies in the Netherlands and help you establish your business.

During the past decade virtual currencies, such as Bitcoin, Qtum, Litecoin and Ethereum, have become increasingly popular. They are currently used as both methods for payment and investment instruments. The emergence of cryptocurrencies led to a legislative vacuum that had to be replaced by adequate regulations.

The present publication focuses on Bitcoin (by far, the most popular virtual currency) taxation. Bitcoins substitute real currencies and have a real monetary value. This means that they can be converted into US and Australian dollars, Euros or any other virtual currency. Most Bitcoin transactions are anonymous and take place on the Internet. Bitcoins are not regulated and do not depend on backings from central banks and governments.

Even though under most jurisdictions the Bitcoin currency is not considered as legal tender, some taxation systems recognize its significance and the respective authorities have proposed a particular fiscal treatment. Below is a brief overview of methods for Bitcoin taxation in the USA, the EU, UK, Germany, Australia and Japan.

Taxation on Bitcoin in the USA

In collecting federal tax, the Revenue Service of the United States considers Bitcoin as property, not as a currency. All transactions with Bitcoin are taxed in line with the principles valid for property taxation. Therefore details on Bitcoin transactions need to be submitted to the Revenue Service for the purposes of taxation.

Taxpayers offering services or goods paid in Bitcoin are required to report the amount of gained Bitcoin in their yearly tax returns. Bitcoin value is calculated taking into account the fair value on the market in US dollars (exchange rate) at the time of receipt of the payment.

If the taxpayer is using the cryptocurrency as a capital asset (as investment property such as bonds, stocks, etc.), he/she should consider any taxable losses or gains. Taxable gains result from transactions where the received value in dollars is higher than the virtual currency’s adjusted basis. Alternatively, a loss results from transactions where the received value in USD is lower compared to the virtual currency’s adjusted basis.

In the United States, people involved in mining of Bitcoins (validating transactions and maintaining a ledger) are also obliged to pay taxes. In case of successful mining, they have to add the value of mined Bitcoins to their total annual income.

Failure to fulfil the tax requirements for virtual currencies can result in penalties. Compliance with the US tax regulations and accurate assessment of taxes related to Bitcoin transactions can be achieved through maintenance of detailed records.

Bitcoin taxation in The EU

In 2015 the highest court in the European Union (ECJ) determined that transactions in Bitcoin shall not be charged with VAT in connection to the legislative provisions for transactions in bank notes, coins and currencies as means for payment. Therefore the European Court of Justice considers Bitcoin as a currency rather than property.

Even though Bitcoin transactions are not subject to VAT, they may incur other taxes, for example on income or capital gains. Bitcoin is treated differently for the purposes of taxation depending on the EU Member State.

United Kingdom

The United Kingdom treats Bitcoin in the same way as foreign currencies. Bitcoin transactions are subject to the rules for taxation applicable to currency losses and gains. On the other hand, transactions with Bitcoin that are considered “speculative” may be exempt from taxes. The information on measures for tax enforcement connected to transactions in Bitcoin provided by the local tax authority (HMRC) is rather vague. It implies that such exchanges are to be considered on a case-by-case basis, depending on the particular circumstances and established facts.

Germany

Since 2013 the country has been treating Bitcoin as private money. Even though the virtual currency is taxable at a rate of 25 percent for capital gains, the tax is chargeable only in case the Bitcoin profit is accumulated in the course of 1 year after the virtual currency was received. Therefore taxpayers holding Bitcoin for more than a year are not liable for tax on capital gains. In this case, any virtual currency transactions will be considered as private sales that are non-taxable. In Germany Bitcoin is treated in a way similar to shares, stocks and other investments.

Taxes on Bitcoin in Japan

The country recognises Bitcoin officially as a method of payment. Since July 01, 2017 the currency is not subject to consumption tax. Japan considers virtual currencies as values similar to assets. As such, they may be transferred in a digital manner or used for payment. Therefore profit from trade in Bitcoin is treated as business income and generates tax liabilities for capital gains and income.

Bitcoin taxes in Australia

The country considers all transactions in Bitcoin or any other virtual currency as barter arrangements. The national taxation system recognizes Bitcoin as an asset generating capital gains rather than as a foreign currency or money. All Bitcoin transactions must be properly documented, recorded and dated. Received payments must be declared in Australian dollars in the same manner as normal income.

Personal transactions with Bitcoin are exempt from taxes if they meet the following conditions:

1.) the virtual currency is used for purchase of services or goods intended for personal purposes

2.) the transaction value is below 10 000 AUD.

Bitcoin exchange and mining for the purpose of conducting business is taxable as stock trading.

Conclusion

The legal framework determining Bitcoin taxation varies by jurisdiction. Some countries (EU Member States) perceive Bitcoin as a currency, while other (Australia, USA) recognize it as an asset or property. Then there are jurisdictions, such as Japan, that have adopted an intermediate approach and define Bitcoin as a value, similar to an asset.

If you would like to receive more information on Bitcoin taxation in the different EU Member States or how to start a European cryptocurrency business please contact our legal advisors. You can also read on cryptocurrency regulations in the Netherlands.

Capital gains from transactions in cryptocurrencies such as Bitcoin are increasingly becoming taxable in countries worldwide. Therefore taxpayers are under the obligation to include cryptocurrency transactions in their yearly tax returns. Non-compliance may lead to serious penalties. This raises the question whether tax authorities are able to adequately identify cryptocurrency owners in order to collect the liabilities.

The anonymity issue

The main concern connected to taxation of cryptocurrencies is their traceability: virtual money is often gained, spent and traded on the internet with full anonymity. Furthermore, additional techniques for anonymization, e.g. private networks for virtual trade and mixing services, provide protection of personal details making transactions virtually untraceable.

The search for solutions

Some countries are taking measures to identify cryptocurrency owners in an attempt to solve the problem with anonymity. The following text discusses the actions taken by China, where most transactions in Bitcoins are concluded (95 percent of global trade for 2017).

Aiming to combat unlawful transactions in Bitcoins, the government of China has lately adopted regulations that require local exchangers and traders to follow the new policy of the National Central Bank with mandatory verification of personal account details. Thus Bitcoin users are officially required to provide particular information about their transactions, including login details, account information, description of funding sources and history of transactions. These regulations allow the Chinese authorities to collect more details about people exchanging cryptocurrencies, including Bitcoin, to determine their sources of capital and to mitigate the risk of illegitimate actions with virtual money.

Surveillance of internet traffic

Some countries do not have comprehensive strategies and policies intended to make Bitcoin traders respect the relevant tax liabilities and to stop money laundering involving virtual currencies. Thus the local authorities rely on people to report voluntarily their income from Bitcoin transactions by including it in their yearly tax returns. Such is the case with taxpayers in the USA, who are obliged to keep records of cryptocurrency transactions and report any generated income. However, up to now, the reporting level is comparatively low. For example, in the USA only 802 persons reported their income from cryptocurrency transactions in their annual tax returns for 2015.

When the expectation for voluntary reporting is not fulfilled, governmental organizations may resort to intercepting Internet traffic in order to identify Bitcoin users involved in cryptocurrency transactions. This method is working especially when users:

1) mention online personal details such as name/Bitcoin address;

2) Exchange Bitcoins for other currencies. Currency exchange often requires verification of identity, such as copies of personal identifications documents and bank statements. Therefore these transactions could be used to track Bitcoin traffic in both directions: outgoing and incoming;

3) use Bitcoins for payment. The purchase of services and goods online most often requires contact details, e.g. address for delivery (when delivery is not digital). Therefore the taxmen can identify the recipients of these goods; and

4) use Bitcoin wallets without options for masking the IP address.

Conclusion

As described above, the anonymous use of virtual money raises many issues related to tax collection. More countries are gradually adopting measures to resolve the matter. In 2017, after the government of China enforced specific regulations, the EU Parliament and Council prepared a proposal aiming to identify cryptocurrency owners. The document states that the responsible authorities need to monitor virtual currencies since anonymity is an obstacle, not an asset to the Community.

Read here in case you are interested in starting a cryptocurrency business in the Netherlands.

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