Belgium – Cryptocurrencies: recent tax developments

Cryptocurrencies are also gaining traction as a means of payment. Mastercard, for example, announced that it will include a few cryptocurrencies in its payment network this year, and there is an increasing number of bitcoin ATMs popping up in Belgium.

Bitcoin’s newfound popularity has recently raised some concerns in Parliament; some parliamentarians have expressed the need for measures to prevent tax evasion through cryptocurrency transactions and the non-reporting of taxable income. A reason to look at the latest tax developments on this front.

1. VAT

Transactions, including negotiation, concerning currency, banknotes and coins used as legal tender, with the exception of collectors’ items, are exempt from VAT. The services of brokers and agents are also expressly exempt from VAT. Hence, the transfer of coins and banknotes that are not legal tender (or traded for numismatic purposes) is regarded as the supply of goods.

Apart from El Salvador this year, countries generally do not recognise cryptocurrencies as legal tender, and thus, one would expect any transactions with such currencies to be subject to VAT.

Surprisingly, in 2015, the EU Court of Justice ruled that Bitcoins are a contractual means of payment and that transactions relating to such currencies, in so far as they have been accepted and used by the parties to a transaction as an alternative means of payment, constitute financial transactions. Therefore, transactions consisting of exchanging traditional currencies for Bitcoins and vice versa – performed in return for payment of a sum corresponding to the margin resulting from the difference between the price paid by the operator to purchase the currency and the price at which he sells it to his clients – constitute transactions exempt from VAT.

The Belgian VAT Administration has aligned its stance with this case law. However, it has also pointed out that the intermediary services provided by an online exchange platform that limits itself to making specific software available for consideration in order to provide cryptocurrency users with access to a digital interface, do not in any way exhibit the essential characteristics of an intermediary service as defined by the ECJ. Therefore, they cannot be regarded as exempted intermediary services.

2. Income tax

Corporate and institutional investors – Any Belgian company that generates an income/gain (or a loss) from trading and/or exchanging cryptocurrencies will be taxable (or deductible) under the standard corporate income tax rules (in principle, at 25%).

Considering that tax law does not provide for a deviating valuation method, any revaluation gain or loss for accounting purposes will also be a (taxable) gain or a (deductible) loss for tax purposes.

Various booking and valuation methods have been suggested in legal doctrine. But in March 2021, the Belgian Commission for Accounting Standards published a draft opinion on the valuation and booking of cryptocurrencies used as a means of payment.

Considering that virtual coins are a digital representation of a value that is not issued or guaranteed by a central bank or government, nor linked to or having the status of legal tender, but merely accepted as a means of trade between parties, the Commission rules out an entry as “cash (in bank)” or as “(other) investments”. The law defines both qualifications in relation to a credit institution (i.e., as cash or term deposit with a bank), which both imply a certain degree of financial reassurance (in terms of steady value or immediately acceptable means of payment). Cryptocurrencies are, to the contrary, very volatile and not generally accepted means of payment.

Therefore, the Commission concludes, by lack of any better alternative, that cryptocurrencies should be booked as “other amounts receivable”, with a note in the financial statements clarifying which amount relates to cryptocurrencies.

“Other amounts receivable” must be depreciated (and thus create a loss) if it is certain that the receivable cannot be recovered (e.g., the crypto wallet has been hacked). A depreciation is allowed if the realisation value at the closing of the financial year is lower than the book value.

Individual investors – The situation is slightly more complicated for individual investors. It requires some appreciation of facts and circumstances that may be different from one tax official to the other. Potential investors should therefore seek guidance to help them assess the relevant facts and circumstances.

In practice, one could distinguish three categories of individual investors:

a) The reasonably prudent and diligent investor

If the cryptocurrency transactions fall within the normal management of private assets and are carried out without speculative insight, the capital gains on cryptocurrencies are exempt from personal income tax and should thus not be included in the tax return. Although “normal management” is different for each (prudent and diligent) investor, the prudent and diligent nature would generally require that only a limited part of assets is invested in cryptocurrencies and that a longer-term investment strategy is in place.

b) The speculative investor

Cryptocurrency traders generally take more risks, anticipate price fluctuations to capitalise on the volatile price movements and make transactions in a very short timeframe by repeatedly selling at a high point and buying at a low point. There usually is no long-term strategy. To the extent a cryptocurrency trader is not engaged professionally, these types of transactions will fall outside the normal management of private assets or are deemed carried out with speculative insight. In such circumstances, capital gains from cryptocurrencies will be taxed as “miscellaneous income”, to which normally a flat tax rate of 33% (plus municipal surcharges) will apply. When both profits and losses are realised when trading the cryptocurrencies, the losses can be deducted from the profits. Consequently, taxes are only due if the realised profits exceed the realised losses.

c) The professional investor

If a person regularly and professionally trades cryptocurrencies, capital gains from cryptocurrency transactions will qualify as “professional income”. This income is subject to the progressive personal income tax rates (between 25% and 50%, plus municipal surcharges) and may also trigger liability to social security contributions. In these circumstances, the investor should consider whether trading through a company is not more beneficial to his personal situation).

Ruling practice – Given the fine line between normal management of private assets and speculative investments, as well as the undefined threshold of being professionally engaged, it is very easy to end up in a discussion with the tax inspector on this qualification. Case law has developed some relevant criteria which have been picked up by the tax authorities: the frequency and number of transactions, the time between the purchases and sales, the use of professional knowledge and experience, the financing of the purchases with credits and the organisation of the transactions.

In 2017, the Ruling Commission considered this matter for the first time. An IT student enquired about the taxation of the profit realised on the sale of Bitcoins through an application (for the automatic purchase and sale of bitcoins) that he had developed as a hobby and in line with his studies. The Commission ruled that because of its speculative nature, this income was taxable as miscellaneous income.

With ruling requests multiplying proportionate to the increasing interest in cryptocurrencies by investors, the Ruling Commission published a list of 17 questions to assess the tax treatment of capital gains realised on cryptocurrencies. Among other things, the questionnaire takes the following aspects into account when assessing the speculative or professional nature of the transactions in question:

• How long have you been investing in cryptocurrencies? And for what amount?
• What is the frequency of buying and selling transactions in cryptocurrencies?
• What is your investment strategy in cryptocurrencies (buy & hold, day trading, …)?
• Do you also do mining of cryptocurrencies?
• Do you buy or sell cryptocurrencies through an automated process or through automated software? Did you design this process/software yourself?
• What is your current occupation? What studies have you undertaken? Has your professional activity provided you with knowledge of cryptocurrencies?
• What percentage of your total (movable) assets have you invested in cryptocurrencies? What is the current (market) value of your cryptocurrency portfolio?
• Do you also invest in cryptocurrencies for other persons? If so, for whom and in what amount?
• Do you call on the advice of financial and/or IT professionals to invest in cryptocurrencies?

By September 2021, all but a very few of the 30 rulings confirmed the exemption of the gains realised by a reasonably prudent and diligent investor. While some of these decisions limited their validity in time (from 6 to 12 months), others were limited to a certain amount (i.e., to a maximum sale value corresponding to the amount initially invested in crypto coins).

3. Tax transparency

Due to the lack of a legal or regulatory framework and because the cryptocurrency transactions often take place via foreign platforms, the Belgian tax authorities have little or no insight into who is active on the crypto market and which amount of these coins is held, in contrast to the knowledge of bank data that are exchanged internationally on the basis of the Common Reporting Standards.

However, the European Commission is currently working on an expansion (and eighth version) of the Directive on Administrative Cooperation (DAC8) in order to include reporting obligations for crypto-assets and e-money platforms and the exchange of that information amongst tax authorities of the EU Member States. The Commission’s consultation round (which ended on 2 June 2021) aims to define reporting requirements that ensure fair taxation while avoiding excessive administrative burden, while at the time provide for a level playing field and common regulation for the 27 EU Member States. The envisaged dissuasive penalties should also avoid tax avoidance and potential distortions of the internal market.

Observers expect the DAC8 Directive to be adopted in the next 12 months. So, for anyone who has so far given little or no thought to the taxation of their cryptocurrencies, things will change drastically in the near future.