Crypto profit and loss from a tax perspective

Do you also invest in cryptocurrencies? The yields are very variable. But what does the tax authorities think if profit is actually made?

The real world

If you regularly earn extra money by investing, you have the risk that the tax authorities will knock at your door for a contribution. After all, profits made from speculation are taxable as miscellaneous income, at a rate of 33%.

If you go one step further and invest to realize capital gains, you even run the risk that the tax authorities will regard that profit as professional income and that you will be taxed at a progressive rate.

Only if the investment gain is sporadic, one-off, with no loans, no tax is due.

The crypto world

If you plunge into the investment world, take out loans, maybe even write software for mining (i.e. to check transactions), there is a real chance that the tax authorities will qualify all of your actions as a professional activity and that your gains will be taxed at the standard progressive rates. But most hobby investors don't go that far and rather invest what they can afford to lose or invest the proceeds of previous trades. In that case, there will be more likely to be a miscellaneous income.

By the way, note that losses are not deductible: if you make a profit on one transaction and a loss on the other, they do not compensate each other.

It is only when it comes to a one-time transaction or a transaction without the use of any means, that the tax authorities let you keep the profits made. The boundaries between these qualifications are blurred. That is already the case when it comes to stocks, but it is even more so when it comes to cryptocurrencies. Some examples may provide some clarification.

Software

One of the first tax rulings on cryptocurrencies dates from 2017 and concerned a student who had developed software for the purchase and sale of cryptocurrencies. Because it concerned a student, the Ruling Committee was of the opinion that there could be no question of a professional income. But because software was involved and thus there was a hint of 'organized investing', it was considered that any capital gains should be qualified as miscellaneous income.

An IT manager was less fortunate in that regard: he developed a program that allowed him to mine cryptocoins. His PC had to run permanently to do the necessary calculations. According to the Ruling Commission, there was a professional activity there, because the person involved had an IT background (education/profession), his hardware was running permanently and there was a high frequency of transactions (the IT manager sold the crypto coins acquired on a monthly basis).

Another person developed software as a secondary activity. He had bought some crypto coins years ago and had developed a simple program for himself with which he could perform transactions automatically. Since the person concerned's main occupation was not in the investment or IT sector, it involved very simple software and also very limited amounts, the profits here were not professional income, but were qualified as miscellaneous income.

Amounts

A lot also depends on the amounts which are at stake. When several tens of thousands of euros are used, the tax authorities (or Ruling Commission) will judge more quickly that there is at least a miscellanious income. Especially if money is borrowed for it.

Another trigger is the size of the free available capital. If the investment exceeds 25% of the available capital, the Ruling Committee will in principle judge that this is miscellanious income.

Other criteria

In the meantime, the Ruling Commission has published a list of 17 criteria that it also uses when it has to judge whether or not a capital gain should be regarded as miscellaneous income. That list was updated at the beginning of 2022 and is a guideline for the potential investor to see how far he can go.

In addition to the aforementioned aspects – are you also professionally involved in this type of activity and the size of the investment – also play a role:

the origin of cryptocurrencies: were the cryptocurrencies donated or inherited? Then there is rarely if ever a speculative insight and the profits are not taxed. Did you borrow to make the investment? In that case, in practice there is indeed a speculative insight and the tax authorities will always tax the proceeds as miscellaneous income.

investment strategy: how many transactions are taking place? Is there an investment strategy? Is software being used? … The more thoughtful trading of cryptocurrencies – possibly in combination with other investments – increases the likelihood that the profits will become taxable as miscellaneous income or even as professional income.

duration: how long have you been doing this?

support: are you guided by professionals from the sector?

Companies

For companies that deal with crypto currencies, everything is a bit simpler: all income that a company obtains, is always professional income.

Possible problems are more related to the deductibility of professional expenses, because unlike income, a company's expenses are not by definition professional. Expenses must be incurred to earn or maintain income. Moreover, it is generally accepted that the costs must also be part of the corporate purpose of the company. Although case law has placed less emphasis on this in recent years, it is still advisable to take a look at the extent to which your company's articles of association allow you to bet on investments, whether or not speculatively.

Loss

A qualification as miscellanious income' has the advantage that the income from crypto investments is not added to the professional income, but is taxed separately at 33%. The costs you incurred are deductible.

As a general rule, losses are not deductible. There is no 'consolidation' of the different types of miscellaneous income you obtain. It can sometimes be even more beneficial to qualify as professional income, because then you can deduct the losses on your investments not only from your investment profits, but also from your other income.

However, do not take this lightly: the tax authorities will also realize why you suddenly claim to make investments professionally. Moreover, the tax authorities can then – if you do make a profit again – label that profit as professional income. Or even worse, the tax authorities can also look at the past and present you the bill for the 'professional' profits you have already made...