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.