The Direct Taxation of Cryptocurrency Tokens in
National and International Situations
An investigation into the feasibility of employing the current national and international framework to tax cryptocurrency tokens
Masterscriptie Internationaal en Europees belastingrecht I.G. Beschoor Plug
Studentennummer 12451010 Eerste lezer: C. Wisman Tweede lezer: M. van Dun
Abstract
Although the cryptocurrency craze that reached its zenith in 2018 has somewhat subsided, its potential for application and value has not. Some liken its speculative fervor to the Dutch tulip mania in the early 17th
century.1 Speculative or not, immense wealth can be made off the right cryptocurrency. This wealth, in
accordance with the ability-to-pay principle, is liable to taxation. This thesis seeks to address taxation issues concerning cryptocurrencies. Direct taxation allows for an analysis of the concept of (taxable) income in relation to cryptocurrencies.
The first chapter is aptly named ‘the tenets of cryptocurrency’: cryptocurrency transactions, exchanges, investments and payments are practiced with an arduous zeal that is reminiscent of religious devotees.2
This chapter will only describe the cryptocurrency commandments as far as is necessary for the scope of this thesis. The quandary of the legal classification of cryptocurrency will be discussed as well.
This novel currency – if it can even be considered a currency – represents value, and therefore has to be liable to tax. By classifying cryptocurrency tokens (which are digital assets or means of payment within a cryptocurrency project) in accordance with their function to existing taxable objects such as shares, debts and vouchers, less legislation will need to be engendered to provide for this ever-changing technology. Not all tokens can be simplified and likened to existing taxable objects. For these types of tokens this thesis endeavors to find taxable characteristics nonetheless.
Hereafter, the fourth and fifth chapter, following a bottom-up approach, will address the fiscal treatment of tokens nationally and internationally. The fifth chapter provides analysis and recommendations virtual permanent establishment, seeing as cryptocurrencies are an inherently decentralized cross-border issue.
1 N. Popper, ‘After the Bust, Are Bitcoins More Like Tulip Mania or the Internet?’, New York Times 23 April 2019, https://www.nytimes.com/2019/04/23/technology/bitcoin-tulip-mania-internet.html. M. Wendorf, ‘What Do Bitcon and Tulip Mania Have in Common?’, Interesting Engineering 6 June 2019,
https://interestingengineering.com/what-do-bitcoin-and-tulip-mania-have-in-common.
2 The cryptocurrency devotees have even developed their own vernacular, like the ‘hodl’ mantra which means that the tokenholder will hold (or ‘hodl’) on to his tokens in the face of a gyrating market value.
Chapter 1: The tenets of cryptocurrency...7
1.1 Introduction...7
1.2 What is cryptocurrency...7
1.2.1 Advantages and Disadvantages of Cryptocurrency...8
1.3 Cryptocurrency Actors...10
1.4 Classification of Cryptocurrency...12
1.4.1 The Netherlands...12
1.4.2 Classification of Cryptocurrency in the European Union...14
1.4.3 Classification of Cryptocurrency by international actors...14
1.5 Conclusion...16
Chapter 2: Functional classification of cryptocurrency...17
2.1 Introduction...17 2.2 Utility Token...18 2.3 Debt Token...20 2.3.1 Derivative Token...21 2.4 Equity Token...21 2.4.1 Security Token...22
2.5 Coins, tokens and tax law...23
Chapter 3: The Concept of Income in Dutch Tax Law...25
3.1 Introduction...25
3.2 Fundamental principles of fiscal income...25
3.3 Fiscal Income...27
3.4 Personal income tax...27
3.4.1 Box 1: Income derived from legal partnership...30
3.4.2 Box 1: Wage...31
3.4.3 Box 1: Income from other work...31
3.4.4 Box 2 Substantial Interest...32
3.4.5 Box 3 Saving and Investments...33
3.4.6 Personal Income Taxation Conclusion...34
3.5 Personal income taxation of cryptocurrency...34
3.5.1 Equity tokens...35
3.5.2 Utility tokens...35
3.5.3 Debt tokens...36
3.5.4 Conclusion...36
3.6 Corporate income taxation act...36
3.6.2 Corporate income taxation and cryptocurrency...37
3.6.3 Equity tokens...38
3.6.4 Debt tokens...39
3.6.5 Utility tokens...40
3.7 Dividend tax...40
3.7.1 Dividend taxation and cryptocurrency...41
3.7.2 Equity tokens...41
3.8 Withholding tax on interest and royalties...42
3.8.1 Withholding tax on interest and royalties and cryptocurrency...42
3.8.2 Utility Tokens...43
3.8.3 Debt Tokens...43
3.9 Conclusion...44
Chapter 5: Taxing jurisdiction...45
5.1 Introduction...45
5.1.2 Source-based and residence taxation...45
5.2 Personal income taxation apportionment...46
5.2.1 Personal income taxation and crypto tokens...47
5.3 Corporate income tax apportionment...48
5.3.1 Corporate income taxation and crypto tokens...49
5.4 Dividend withholding tax apportionment...50
5.4.1 Dividend withholding tax and crypto tokens...50
5.5 Proposed withholding tax on interest and royalties apportionment...50
5.5.1 Taxing jurisdiction and proposed withholding tax on interest and royalties with crypto tokens.51 5.6 Conclusion...51
5.7 Unilateral taxing apportionment...51
5.8 Bilateral treaties: OECD Model Tax Convention...52
5.9 Model Tax Convention and Crypto Tokens...52
5.9 Conclusion...53
Chapter 6: Permanent Establishments and Cryptocurrency...54
6.1 Introduction...54
5.9.1 Base Erosion and Profit Shifting Package...54
6.2 Permanent Establishment according to the OECD...55
6.2.1 Virtual Permanent Establishment According to the OECD...56
6.3 Permanent Establishment according to the EU...61
6.3.1 Virtual Permanent Establishment According to the EU...61
6.4 Evaluation of virtual permanent establishment approaches...63
6.4.1 Destination Tax...64
6.4.2 Users as permanent establishment...65
6.4.3 Markers of a digital presence...66
6.5 Evaluation...67 6.6 Conclusion...69 Chapter 7: Conclusion...70 8. Bibliography...72 Books...72 Dissertations...72 Reports...72 Articles...73 Websites...74
Documents of the European Union...77
Dutch Parliamentary Documents...78
Case Law...78
Chapter 1: The tenets of cryptocurrency
1.1 Introduction
In order to evaluate the impact of cryptocurrency within the realm of fiscal law, its rudimentary functioning, players and current legal classification will first be set out.
Cryptocurrencies and other applications of blockchain technology are increasingly popular. The rise of smart contracts and blockchain applications in healthcare and government are proof of the fact that normal people cannot be inoculated against the blockchain fever that gripped the world since Satoshi Nakamoto published his White Paper on Bitcoin in 2008.3 As
the focus of this thesis is the fiscal repercussions of cryptocurrency, the complicated
technology powering blockchain will not be discussed in depth. This chapter will explain the basics concerning cryptocurrency, its functions, the players involved, the current fiscal and legal framework and the valuation of cryptocurrency – to the extent that is relevant to the scope of this paper.
1.2 What is cryptocurrency
Bitcoin and other cryptocurrency (Altcoins) can largely be explained as a response to the growing mistrust in the status quo of centralized banking. A clarifying example of this is the convergence of the economic collapse in Cyprus in 2012 (which resulted in citizens not being able to access their money stored in centralized banks) and the rise of cryptocurrency and establishments where it is accepted as a payment.4 The decentralization of cryptocurrency
entails that it is not susceptible to policies originating from states or international organizations. It is often described as ‘trustless’, meaning that a trust mechanism is not required from other parties in order to successfully transact.5 A consensus mechanism
facilitates cryptocurrency in lieu of a centralized institution. The consensus mechanism is located in the ledger of the cryptocurrencies’ blockchain. This ledger is public and accessible.
3 S. Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, https://bitcoin.org/bitcoin.pdf.
4 M. Farrell, ‘Bitcoin prices surge post-Cyprus bailout’, CNN Business 28 March 2013, money.cnn.com; A. Blundell-Wignall, ‘The Bitcoin Question: Currency versus Trust-less Transfer Technology’, OECD Working Papers on Finance, Insurance and Private Pensions, No. 37 2014, p. 3.
5 For an opposite point of view, see Bratspies. Rebecca Bratspies advocates for the multiple levels of trust inherent to the modus operandi of cryptocurrency. R.M. Bratspies, ‘Cryptocurrency and the Myth of the Trustless Transaction’, Michigan Technology Law Review 2018/25.1, p. 19-20.
This public ledger is the convergence of all transactions, and is seen as the ‘true’, verified state of the cryptocurrency.6
In order to facilitate a transaction, a person’s private and public key, consisting of a number of bits are needed. When someone wants to transfer cryptocurrency, the cryptographic hash7
function comes into play. This computational work is usually done by persons labeled as ‘miners’, who receive a renumeration for their work. Their proof of work is added to the already existing blockchain; available for everyone with a computer and an internet
connection to verify.8 This public aspect of blockchain combats fraudulent transactions (when
two chains appear, the lesser known and lesser built upon one is assumed to be false).9 This
system curtails the necessity of trusting a single player (for example, a bank) and instead places trust in the consensus mechanism of the entire network.10
There are many ways of categorizing cryptocurrency applications. One can divide them into coins and tokens, or otherwise, as utility, equity and debt tokens. There are nuances, types, subsets and uses of cryptocurrency aplenty, but for the use of this paper, only coins and tokens will be used to explain the valuation of, and the moment of taxable profit as relating to cryptocurrency. A crypto coin is a form of digital money; Bitcoin being its most notorious example. Crypto coins are transferable, mineable, and its ownership is noted a public
blockchain. Tokens a similar to coins, however, they are used within a cryptocurrency and it additionally gives its owners right to participate in the cryptocurrency’s underlying
ecosystem. The differences between coins and tokens will be elaborated upon further in the following chapter.
6 B. Egelund Miller, e.a., ‘Automated Execution of Financial Contracts on Blockchain’, Bus Inf Syst Eng 2017/59.6, p. 457.
7 A cryptographic hash function is a mathematical algorithm that converts large swathes of data into a unique string of text.
8 “Proof-of-work approaches that require high levels of energy but guarantee relatively high levels of consistency and protection against forgery by any actor in the network.” M. Risius & K. Spohrer, ‘A Blockchain Research Framework’, Bus Inf Syst Eng 2017/59.6, p. 387.
9 The protocol governing the cryptocurrency contains procedures to determine which transaction is fraudulent. 10 Bratspies 2018, p.19; P. Kasireddy, ‘EL15: What Do We Mean by "Blockchains are Trustless,"’
Medium 2 February 2018, https://medium.com/@preethikasireddy/eli5- what-do-we -mean -byblockchains-are-trustless-aa420635d5f6.
1.2.1 Advantages and Disadvantages of Cryptocurrency
The fervor for cryptocurrency becomes apparent when noting the multitude of advantages that come along with this novel technology. To name a few, cryptocurrency has lower transaction costs, lower transaction time and restrains the interference of public authorities when compared to traditional currency.11 The anonymity of cryptocurrency is also a selling
point. Personal data need not be shared in order to transact, leading to more control and less intrusion and additional costs by way of middlemen such as banks during a transfer of ownership.12 The blockchain technology behind cryptocurrency is capable of revolutionizing
a host of industries and systems, such as healthcare, marketplaces, notary services, supply chain information and government services.13
There are, however, clear drawbacks to the cryptocurrency craze which cannot go
unmentioned.14 Firstly, it should be made clear that a current regulatory framework is
non-existent. This lacunae of regulation has prompted states like Germany, France, Korea and Thailand to pre-emptively ban the use of cryptocurrency as a currency.15 China has gone so
far as to prohibit the conversion of Yuan (¥) to Bitcoin (and other Altcoin) deposits into the BTC China.16 This fear can be juxtaposed to the fact that Chinese bitcoin mining controls up
to 80% of the network, which implies that cryptocurrency may not be as decentralized as is presented from the outset.17 Furthermore, decentralization cannot simply eliminate the
possibility of fraudulent transactions. This can be illustrated by a 51% attack.18 Besides this
51% coup, digital attacks can be centered on platforms as was the case with Mount Gox, which led to hackers fleeing with a booty of bitcoins valued at $473 million.19 This also plays
11 EBA Opinion on ‘virtual currencies’, European Banking Authority 2014 , EBA/Op/2014/08 (available online), p. 16-20.
12 Blundell-Wignall 2014, p. 15 13 Blundell-Wignall 2014, p. 7.
14 The functional limitations of cryptocurrency will not be discussed, seeing as these do not pertain to the scope of this thesis.
15 Blundell-Wignall 2014, p. 11.
16 S. Leng, ‘Beijing bans bitcoin, but when did it all go wrong for cryptocurrencies in China?’, South China Morning Post, 5 February 2018, https://www.scmp.com/news/china/economy/article/2132119/beijing-bans-bitcoin-when-did-it-all-go-wrong-cryptocurrencies.
17 Bratspies 2018, p. 26; R. Sharma, ‘China Intensifies Crackdown on Bitcoin Mining’, Investopedia 25 June 2019, https://www.investopedia.com/news/china-intensifies-crackdown-bitcoin-mining/.
18 If a miner or pool of miners posses 51% or more of the nodes, they can essentially control and centralize the blockchain. Blundell-Wignall 2014, p. 8. For examples of said attacks, see: Bratspies 2018, p. 25. There are also tactics such as “pump and dump” groups which manipulate the market by skewing demand and supply at their whim, but they will not be expounded upon in this paper. Xu, J., & Livshits, B., The Anatomy of a
Cryptocurrency Pump-and-Dump Scheme, Santa Clara CA: Proceedings of the 28th USENIX Security Symposium 2019, p. 1606-1625., par 2.2.
19 J. Wieczner, ‘$1 Billion Bitcoins Lost in Mt. Gox Hack to be Returned to Victims’, Fortune, 22 June 2018, https://fortune.com/2018/06/22/bitcoin-price-mt-gox-trustee/.
into the anonymity of cryptocurrency, allowing for illegal transactions such as terrorist financing, tax evasion and money laundering. A well-known example on the Darkweb is the Silk Road market place, which accepted bitcoin as payment for illegal drugs and guns. Furthermore, contracts concluded with cryptocurrency might be void or illegal in the eyes of the law.20
It has been well-documented that cryptocurrency’s value gyrates wildly and is extremely speculative. There are a host of competitors within the cryptocurrency market. To name a few: Worldcoin, Litecoin, Mastercoin, Dogecoin, and around another 1,600 cryptocurrencies saturate the cryptocurrency market; the barriers of entry to the market are low. To add to the speculative nature of this currency, is the fact that cryptocurrency with dubious origins might not be able to be converted into a legal tender.21. Finally, something can be said for the fact
that a trustless system works until the trust is broken, at which moment no legal or regulatory framework is in place to remedy the situation.22
1.3 Cryptocurrency Actors
There are many lucrative and/or lewd ways to exploit cryptocurrencies. The actors deemed relevant for the purpose of this thesis are briefly expounded upon. Actors including wallet providers andtechnical service providers will not be discussed.
A cryptocurrency is created by its founders, these actors ‘seed’ the market by providing miners with algorithms to generate and verify blocks within the blockchain.23 The founders
further determine the protocol, which includes the envisaged infrastructure of the cryptocurrency and whether the total issuance volume to coins will be (un)limited.24 By
engendering an in-demand crypto coin, the founders’ coins will appreciate in value accordingly.
One way of increasing demand for a cryptocurrency is by means of an initial coin offering (hereafter: ICO). An ICO can be compared to an IPO, however, these two concepts are far from similar. ICOs, unlike IPOs are neither subject to any regulatory nor legislative
framework, nor consumer protection. It is more akin to the process of crowdfunding. Persons 20 European Banking Authority 2014, p. 23-37.
21 Blundell-Wignall 2014, p. 11. 22 Bratspies 2018, p. 19-20. 23 Blundell-Wignall 2014, p. 8.
can invest in a cryptocurrency by way of an ICO, and thereafter receive an unit of
cryptocurrency in the cryptocurrency company’s wallet, epitomized as a ‘smart contract’.25
An ICO is a savvy way to boost the popularity of a crypto coin: it has been estimated that in 2017, 875 ICOs raised over $6 billion.26 These ICOs, however, need to be taken with a pillar
of salt; according to theICO advisory firm Satisgroup, in the same year, 78% of all ICOs were scams, and another 7% had failed.27
Once a cryptocurrency is in circulation, by means of an ICO or otherwise, a cryptocurrency exchange comes into play. This is an online market where persons can trade or exchange cryptocurrencies for other cryptocurrencies or fiat currency. Currently, there is no generally accepted valuation method or a central cryptocurrency bank to peg cryptocurrency to a (gold) standard, meaning that the exchange rates tend to fluctuate.28
Trading platforms are similar to cryptocurrency exchanges in that they trading
cryptocurrencies. The crucial difference is that trading platforms do not engage in trading themselves. Cryptocurrency users are able to trade directly (by) themselves.29 Additionally,
trading platforms do not exchange in fiat currency.
Miners have been briefly described when explaining the modus operandi of cryptocurrencies. For every block they add to the blockchain by verifying the hash by means of an algorithm, they are reimbursed with (a fraction of a) cryptocurrency coin. This cryptocurrency can either be limitless, or limited; the latter meaning that the reimbursement will decrease over time. Alternatively some cryptocurrency ecosystems run on Proof of Stake (PoS) instead of mining. The key difference with mining is that the profitability of proof of staking is not necessarily dependent on processing power like mining, but on the amount of coins the person staking holds. Both processes serve to validate blocks in the blockchain.
Persons investing in cryptocurrency can obtain their coins and tokens by means of an ICO, currency exchange platforms, as a reward for mining, receive it as a payment or gift. They rely on either single or pools of miners to validate their transactions. Persons can use 25 Bratspies 2018, p. 46
26 ‘Funds Raised in 2017’, ICOData, https://www.icodata.io/stats/2017.
27 Bratspies 2018. p.48, S. Dowlat, ‘Cryptoasset Market Coverage Initiation: Network Creation’, Satis Group 11 July 2018, https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ.
28 Blundell-Wignall 2014, p. 8. 29 COM/SDD/DAF(2018)1, p. 9.
cryptocurrency to private ends, or within a business. This distinction, as we will see in the next section, results in diverging fiscal consequences.
The aforementioned actors can be distilled into either natural persons, non-transparent or transparent legal entities. This distinction enables tax regimes to identify a tax subject. These actors can engage in cryptocurrency endeavors in four (main) manners: payment, mining, exchanging and storing.
1.4 Classification of Cryptocurrency
As mentioned previously, cryptocurrency does not enjoy a regulatory or legislative
framework. It does not function under the auspices of any single state or organization. Thus, state governments and international organizations such as the EU and OECD are hesitant to attach legal value and legitimacy to any crypto coin. The current stance of the Netherlands, the EU, OECD and other relevant international institutions on the legal and fiscal
classification will now be identified.
1.4.1 The Netherlands
The Netherlands has not been able to avoid crypto-fever, therefore, the Dutch government has published documents regarding the fiscal treatment of cryptocurrency. As we will see, however, the aforementioned ambiguity inherent to the fiscal and legal status of
cryptocurrency is far from resolved. The Dutch Minister of Finance and the Dutch Central Bank opine that cryptocurrency cannot be equated to fiat money, seeing as it does not stand the test of the threefold characteristics of money: a trusted means of payment, a store of value and an unit of account.30 In the same vein, the Minister deduces that the fiscal treatment of
cryptocurrency is not likened to fiat money, but can be classified as a means of income.
For mining and trading to constitute as a business, a form of labor or investment must be put into the activity, a profit is intended and can objectively be expected. To reiterate the
Minister’s findings, the classification of a cryptocurrency business is “strongly circumstantial and based on the actual facts of the case”.31 If a company receives a
30 Brief van de staatssecretaris van Financiën 28 mei 2018, 2018-0000082316, p.1; DNB ‘Bitcoin is geen geld’ De Nederlandsche Bank 29 januari 2018, https://www.dnb.nl/consumenten/actuele-themas/dnb371844.jsp#. 31 “Deze bronvraag […] is sterk afhankelijk van de concrete feiten en omstandigheden van het geval”. Brief van de staatssecretaris van Financiën 28 mei 2018, 2018-0000082316, p. 2.
renumeration for services or goods in cryptocurrency, its value converted to euros – valued at the time service or delivery of its goods – will be taxed. The same valuation is required if one receives wages in cryptocurrency. If a company retains cryptocurrency, it can be labeled as current assets, or even stock. The Dutch Minister of Finance is of the opinion that good business practice (goed koopmansgebruik) should be taken into account when valuing cryptocurrency.32
1.4.1.3 Legal Classification
Outside the fiscal scope of cryptocurrency, the financial and legal status of cryptocurrency is undetermined. A crypto coin or token can be qualified as neither a financial nor investment instrument. Therefore, the existing policies in the Netherlands which regulate the issuance of financial instruments, its prospectus or trading permits do not cover crypto coins or tokens. The Dutch Authority for the Financial Markets (hereafter: AFM) - the Dutch watchdog where financial services are concerned - does not have authority to regulate cryptocurrency.
According to the Dutch Minister of Finance, an (albeit lower) level of consumer protection does apply to cryptocurrency under the auspices of the Netherlands Authority for Consumers and Markets (hereafter: ACM).33
The Dutch judiciary system has – as of writing this thesis – only encountered one case which dealt with the qualification of cryptocurrency. This case has worked its way from the Court of Overijssel34 to the Higher Court of Arnhem-Leeuwarden.35 This case resulted in the
affirmation of both aforementioned courts that cryptocurrency cannot be considered as a legal tender; but that it is suitable for exchange purposes.
To conclude, the Dutch legal framework concerning cryptocurrency is fragile at best. Dutch legislators are weary of this novel technology. To stem the use of this anonymous payment method, the Minister of Finance does not conclude cryptocurrency to be a legal tender. In my opinion, this is the correct interpretation of cryptocurrency, seeing as it does not enjoy the same regulation, rules and safeguards that fiat money has to endure. For example, there is no deposit guarantee scheme to protect consumers from the bankruptcy of, or an otherwise
32 Brief van de staatssecretaris van Financiën 28 mei 2018, 2018-0000082316, p. 3. 33 Brief van de staatssecretaris van Financiën 8 maart 2018, 2018-0000033278, p. 5 34 Rechtbank Overijssel 14 May 2014, ECLI:NL:RBOVE:2014:2667.
cancellation of a cryptocurrency. Cryptocurrency’s speculative uses such as Bitcoin futures are extremely volatile.36 Furthermore, the lack of effective oversight regarding
cryptocurrencies allow criminal activities such as tax evasion resulting from black market transactions to fester. The Netherlands supports calls of the French and German ministers for talks concerning cryptocurrency within the G20.37 The Netherlands is also member of the
Financial Action Task Force (hereafter: FATF). This is an intergovernmental body that also develops policies to internationally streamline cryptocurrency policies.38 For now,
cryptocurrency is fiscally seen as a source of income, not as a legal currency in the
Netherlands. The fiscal treatment of tokens in the Netherlands will be examined in chapter 3.
1.4.2 Classification of Cryptocurrency in the European Union
The European Central Bank, in accordance with the Dutch AFM, does not consider cryptocurrency to be a legal tender. Similarly, the European Banking Authority describes cryptocurrency as a “digital representation of value”; possibly a commodity or alternatively a form of private money.39 Within the European Union, the landmark case involving
cryptocurrency is Skatteverket v. David Hedqvist). The question put forth was if the buying and selling of bitcoins for a traditional currency would be exempt from VAT under the currency exemption of article 135 paragraph 1 sub (e) of the VAT Directive 2006/112/EC.40
This was confirmed by the European Court of Justice: the exchange of bitcoin for traditional currency and vice versa, will constitute as a VAT exempted service as a virtual currency. The European Court of Justice equated Bitcoins and other cryptocurrency to normal currency resulting in the sale of cryptocurrency not being taxed with value added tax.
36 Brief van de staatssecretaris van Financiën 8 maart 2018, 2018-0000033278, p. 1.
37 T. Escritt, ‘France, Germany call for join G20 action on cryptocurrencies’ Reuters 9 February 2018, https://www.reuters.com/article/us-germany-france-g20-crypto/france-germany-call-for-joint-g20-action-on-cryptocurrencies-idUSKBN1FT176.
38 The FATF has developed policies for digital payment services such as prepaid store value cards and mobile banking. Memo ‘De opkomst van de Bitcoin (en alternatieven) als digitale betaaleenheid’, Directie
Informatiemanagement Belastingen, 17 April 2014, p.1. see also: FATF Report: Virtual Currencies: Key Definitions and Potential AML/CFT Risks, Financial Action Task Force June 2014 (available online), p. 1-15. 39 EBA Opinion on ‘virtual currencies’, European Banking Authority 2014 , EBA/Op/2014/08 (available online), p. 11.
40 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (PbEU 2006, L347/1-118).
1.4.3 Classification of Cryptocurrency by international actors
The OECD is hoping to avoid “regulatory knee-jerk reactions” by comprehensively
investigating and collaborating with different cryptocurrency actors to create a tax transparent international regulatory framework.41 The OECD’s opinion has clout, considering its 113
members of the Inclusive Framework on Base Erosion and Profit Shifting and counts 149 members of its Global Forum (on Transparency and Exchange for Tax Purposes). By publishing international fiscal policy recommendations, there will be more legal certainty in the treatment of cryptocurrency profits and losses.42 As the OECD stated in 2015 in its BEPS
Action 1 Report, the digital economy cannot be “ring-fenced” into piecemeal, national profits. A concerted international effort is necessary. Furthermore, the challenges which the OECD seeks to address in the coming years are data, nexus and characterization these need to be resolved where cryptocurrency is concerned.
The previously mentioned intergovernmental organization FATF primarily combats money laundering and terrorist financing. It has proposed to require information regarding the identities involved in crypto transactions.43 If this proposal is accepted by its 36
member-states, the pursuance of identities can be used to attach fiscal implications to transactions which would otherwise go on unnoticed by tax authorities due to the anonymous nature of cryptocurrency technology.
Since 9 July 2018, the fifth EU Anti-Money Laundering Directive (hereafter: AMLD5) has entered into force, explicitly covering virtual currency, which includes cryptocurrency transactions.44 Custodian wallet providers and cryptocurrency platforms are classified as
“obliged entities” under AMLD5 and therefore have a duty to report transactions under this fifth directive.45 All EU Member States must implement the ALMD5 by the 10th of January
2020. The Netherlands is currently realizing the changes brought about by the ALMD5. It should be noted that users of crypto tokens and miners are as of yet not obliged to report 41 G. Medcraft, The OECD and the Blockchain Revolution, Paris: OECD Friends of Going Digital Meeting 2018, p.5; OECD Secretary-General, OECD Secretary-General Report to G20 Finance Ministers and Central Bank Governors, OECD, Buenos Aires March 2018, p. 6.
42 Medcraft 2018, p. 7.
43 FATF Report: Virtual Assets and Virtual Service Providers, Financial Action Task Force 2019 (available online), p. 4.
44 This fifth directive has a short implementation period (18 months), the deadline being 10 January 2020. Kamerstukken II 2018/19, 35 245, 6 (NaV), p. 15.
45 Non-custodian wallets are not covered, as these wallets do not have access to the token holders’ private key and therefore cannot oversee their transactions as gatekeeper. Kamerstukken II 2018/19, 35 245, 6 (NaV), p. 7.
under the WWFT, seeing as these are not the intended intermediaries which AMLD5 seeks to address.46
The IMF, in accordance with the EU and the Netherlands, does not consider cryptocurrency to be a legal tender. It does not meet the three previously mentioned basic requirements of a legal tender. The IMF is weary of the fact that if cryptocurrency becomes widely used and popular, then cryptocurrency may become a substitute of legal tenders.47 The efforts of
international bodies to create a regulatory framework for cryptocurrency will be examined and evaluated in chapter 4.
1.5 Conclusion
A streamlined approach to classify cryptocurrency does not exist as of the writing of this thesis. The Bank for International Settlements and World Bank denote cryptocurrency as a subclass of digital money, whereas the European Banking Association, the European Central Bank, European Securities and Markets Authority, International Monetary Fund and the Dutch government define cryptocurrency as a virtual currency.48 The absence of an agreed
upon classification will undoubtedly lead to mismatches in the allocation of taxing rights in cross-border situations. Possible solutions to this discord will be discussed in chapter 4 and 5. This chapter reviews the basic tenets of cryptocurrency and rudimentary fiscal classification, which will allow us to delve deeper into the fiscal application of crypto currency in the following chapters.
46 EP, Cryptocurrencies and blockchain: Legal context and implications for financial crime, money laundering and tax evasion, European Parliament July 2018, par. 5.2.2.
47 He, D. e.a., IMF Staff Discussion Note: Virtual Currencies and Beyond: Initial Considerations, (IMF Staff Team), 2016 (available online), p. 10.
48 C. Katarzyna, Cryptocurrencies: Opportunities, Risks and Challenges for Anti-Corruption Compliance Systems, Paris: OECD Global Anti-Corruption and Integrity Forum 2019, par. 2.
Chapter 2: Functional classification of cryptocurrency
2.1 Introduction
Cryptocurrency can be used for a variety of proceedings such as payment, exchanging, mining and can be stored. Different subjects can perform these actions, including natural persons, transparent and non-transparent entities. These two factors shroud the fiscal classification of cryptocurrency with additional complexity. The aforementioned subjects (natural persons and entities) are identified in Dutch tax law. The four actions of
cryptocurrency are likewise existing taxable events. In this chapter, the uses of
cryptocurrency will be likened – where possible – to established taxable objects and events within Dutch civil law. This comparison will allow for a clearer consideration of
cryptocurrency’s position within tax law.
Chapter 1 illustrated that the issue of classifying cryptocurrency is far from settled. For the use of this thesis, cryptocurrency can be seen as a decentralized virtual currency.49 The
reasoning behind this label is the fact that cryptocurrency is not a fiat currency, as it is not viewed as a legal tender by any state or institution.50 Virtual currency is not the same as
digital money; which is a digitalized form of fiat currency.51 Cryptocurrency can, however, be
exchanged for fiat currency. This implies that this virtual currency does represent something of economic value. In this chapter it will be shown that there is wealth inherent to
cryptocurrency and that this wealth, in turn should be liable to taxation.
In order to determine the fiscal implications of cryptocurrency, tokens and coins will be distinguished according to their functional aspects. A good start is the established distinction in cryptocurrency between a coin and a token. A cryptocoin is a form of digital money, Bitcoin being its most notorious example. Cryptocoins are transferable, mineable, and its ownership is noted in a public blockchain. Coins can be used independently of an ecosystem 49 FATF 2014, p. 5.
50 Brief van de staatssecretaris van Financiën 8 maart 2018, 2018-0000033278, p. 5, Hof Arnhem-Leeuwarden 31 May 2016, ECLI:NL:GHARL:2016:4219. European Banking Authority 2014, p. 11. IMF 2016, p. 10. Huber e.a. M.F. Huber e.a. ‘Switzerland – By the Same Token: Swiss Tax Questions in the Context of Initial Coin Offerings’, Derivs. & Fin Instrum.s 2018/20.3, par. 2.1.
such as Bitcoin.52 Tokens are similar to coins, however, they are used within a cryptocurrency
ecosystem and it additionally gives its owners rights within an ecosystem. There are nuances, types and uses of cryptocurrency aplenty, but for the use of this thesis, utility, debt and equity tokens will be employed to explain the fiscal implications of cryptocurrency.53 Subsets of
these three tokens will be addressed as well. Within the scope of this thesis, it will be
assumed that equity and utility tokens can be mined and that debt tokens cannot.54 In reality,
this will depend on the rules set out by the inventors of the cryptocurrency within the cryptocurrency network.
When comparing tokens to existing taxable objects, the focus of the token will be its
economic function. This functional approach has also been followed by the Swiss Financial Market Supervisory Authority (FINMA) in Switzerland.55 The economic essential
characteristics of tokens are useful tools to classify tokens in relation to existing objects, in lieu of analysing formal attributes. The possible uses for tokens and their potential fiscal implications will be touched upon briefly, seeing as the token’s fiscal treatment is the topic of the following chapter.
2.2 Utility Token
A utility token operates within a specific blockchain system. It represents a service or product inherent to the blockchain system in which it operates. For example, a Filecoin is a utility token created by the Filecoin cryptocurrency. A Filecoin utility token holder has access to the services provided by Filecoin, namely cloud storage.56 A utility token is generally issued
during the ICO, but can also be exchanged after this event. Although this coin is exclusively of value within the framework of a certain cryptocurrency, it still represents value when used to transact within the system. It gives the holder the right to a service or product of value. This value must therefore be liable to taxation.
52 A.M. Bal, ‘Blockchain, Initial Coin Offerings and Other Developments in the Virtual Currency Market’, Derivs. & Fin. Instrums. 2018/20, par. 2.
53 There are more distinctions that can be made in view of different tokens and coins. In regard to the scope of this thesis, hybrid tokens such as security tokens will not be discussed.
Huber, Guler and Dumont distinguish a fourfold of tokens: payment tokens, utility tokens, asset tokens and hybrid tokens. Huber e.a. Derivs. & Fin. Instrums. 2018/20.3, par 2.3. Tokenmarket.net restricts token types to two kinds of tokens, namely security and utility tokens. ‘What is Token?’ TokenMarket,
https://tokenmarket.net/what-is/what-is-token/.
54 The rules concerning cryptocurrencies depend on the cryptocurrency itself, none are exactly the same. 55 This can be contrasted to the SEC in the USA, which focuses on the differences and likeness between tokens and securities. Huber e.a. Derivs. & Fin. Instrums. 2018/20.3, par 2.1.
Huber, Guler and Dumont identify utility tokens as “agency contracts or licensing
agreements”.57 A utility token represents a claim upon value, namely the goods and services
the utility token can be transacted for. In my view, it therefore functions as a voucher and is in most cases transferable. Within Dutch direct taxation, vouchers are not discussed.
However, since 2019 the Income Tax Act 2001 has added definitions for vouchers with single and multiple uses in regard to the rate of VAT to be paid.58 A voucher is defined as
claim to a contractual consideration (which can be services or goods). This similar to the contractual obligation described by Huber, Guler and Dumont. In my opinion, utility tokens can be equated to multiple use vouchers as defined in VAT legislation, seeing as their purpose cannot necessarily be ascertained at the time of receiving the utility token.59 A
redeemed multiple use voucher will be taxed at its nominal value for VAT liability. This valuation is in line with Dutch corporate and personal income guidelines. When assessing the value of a utility token, like vouchers, it should be taken into consideration that some
vouchers may never be redeemed.60
The classification of a utility token can depend on when the token is purchased. Unlike traditional vouchers, utility tokens can be purchased at an ICO. An ICO is the launch of a cryptocurrency, and by buying tokens, the popularity of the cryptocurrency and the value of tokens increase correspondingly. This can be for investment purposes when done with a savy cryptocurrency business understanding, but in that case a security or derivative token would be a more likely candidate. In my opinion, utility tokens bought at the naissance of an ecosystem can constitute a barter economy. The investment in an ecosystem is a service to the that cryptocurrency, the corresponding token represents a right to a service or good provided by said ecosystem Barter economies are usually not subject to tax, seeing as they tend to play out in within a familial instead of business-oriented environment. Moreover, the investment in a cryptocurrency ecosystem in its infancy is the definition of speculation – thereby not constituting a (credible) stream of income.
57 Huber e.a. Derivs. & Fin. Instrums. 2018/20.3, par 2.3.2. 58 Article 2a paragraph 1 subparagraph s Income Tax Act 2001.
59 (Nav) Kamerstukken II, 34 755, 2017/2018, Wijzing van de wet op de omzetbelasting 1968 (btw-behandeling van vouchers) p.8-9. The VAT treatment of vouchers has been harmonized by Council Directive (EU)
2016/1065 of 27 June 2016 amending Directive 2006/112/EC as regards the treatment of vouchers, OJ L 177/9 of
1 July 2016.
A utility token only functions within an ecosystem. The holder of a utility token does not obtain voting rights or other forms of control within the cryptocurrency ecosystem. For this reason, regulators such as the SEC cannot exert influence over these transactions. This can be contrasted with security tokens, which require investor information and are subject to
regulation. A security token will be elaborated upon later on in this chapter.61
A utility token can also be held passively. For natural persons this will be taxed in box 3 of the personal income taxation. For transparent entities such as legal partnerships and one-man businesses this will be taxed in box 1 of the personal income taxation if the passive
investment is made for commercial reasons - not to personal ends.62
Utility tokens can also be actively exchanged. Profits and losses derived from exchanging said tokens can be taxed in box 1 of the personal income taxation and will be liable for corporate income taxation.
Lastly, utility tokens can also be mined and staked. The potential profit made from mining and staking is liable to taxation in box 1 of the personal income taxation (for natural persons and transparent entities) and for corporate income taxation (for companies).
2.3 Debt Token
A debt token represents a debt or liability. It is essentially a digital short term loan, which takes into account the debt, creditworthiness of the debtor and the interest issued over the debt. A variable or fixed interest can be applied to debt tokens.63 It can be described as a
“tokenized liability.”64 Tokenization describes the process in which a means of payment,
including debts is transformed into randomized numbers in order to encrypt and delete sensitive data. Therefore, a debt token can be seen as an anonymized liability.65
61 E. Watson, ‘Utility Token Vs. Security Tokens: The Howey Test -The Viable Choice for Enhanced Protection in the Cryptosphere’, CryptoGazette, (accessed 26/1/2020) https://cryptogazette.com/utility-tokens-vs-security-tokens-the-howey-test-the-viable-choice-for-enhanced-protection-in-the-cryptosphere/.
62 HR 9 March 1983, ECLI:NL:PHR:1983:AW8960. (Cessna-arrest) 63 Bal 2018, par. 2.
64 Reed, ‘Equity Tokens vs. Security Tokens: What’s the Difference?’ Bitcoin Market Journal 13 February 2019, https://www.bitcoinmarketjournal.com/equity-token/.
65 ‘What is Tokenization?’, Tokenex (last accessed 28/1/20), https://www.tokenex.com/about/what-is-tokenization.
Within Dutch tax law, debts are classified by their definition according to civil law, save for exceptions which are not relevant to the scope of this paper.66 To be sure, the debt must have
a realistic repayment obligation, a formally arranged profit-dependent interest, a contractual term not longer than 50 years and – finally – that the loan must not be subordinated in regard to other loans.67 The debt must represent economic value.68 Insofar debt tokens are loans and
do not violate the aforementioned requirements, it will show inherent similarities to loans and should therefore be treated equally. If a natural person is debtor or creditor of a debt token, it will be taxed at its market value on January 1st in box 3 personal income taxation. If the
cryptocurrency ecosystem allows it, a debt token can be used as a payment. When
transferring a debt – in line with good business practice – the nominal value of the debt will be taken into account when taxing the transaction. Holding onto a debt is likewise possible. In this case, the interest garnered is taxed as profit. Vice versa, a debtor company can claim deduction of interest incurred.69
2.3.1 Derivative Token
It should be clear a debt token does not always mirror a traditional short term loan. This is entirely dependent on the rules of the particular cryptocurrency. For example, a subset of a debt token is a derivative token. A derivative token can be a contract on a security token (security tokens are addressed in section 2.4). Examples of a derivative token is a Bitcoin perpetual swap, an Ethereum option or Bitcoin futures.70 These are speculative endeavors,
which are based on the performance of the underlying security tokens.
2.4 Equity Token
An equity token functions similar to shares in a company. An equity token implies ownership of a share of the company and its profits. Proof of ownership can be found on the blockchain
66 Private law debts that are reclassified for tax law as equity include “bodemloze-putlening”, “schijnlening” and “deelnemerschapslening”. HR 10 September 2001, ECLI:NL:HR:2001:AB3238.
67 HR 10 September 2001 ECLI:NL:HR:2001:AB3238.
68 Art. 5.3 par. 3 ITA, and is taxed according to its the economic value 3.19 ITA.
69 Deduction of interest in terms of commercial income taxation is restricted by a host of anti-tax avoidance rules outside of the scope of this thesis.
70 I. Zaki, ‘An Overview of Security Token Derivatives’, Hackernoon 16 March 2019, https://hackernoon.com/security-token-derivatives-158758c6a301.
of said cryptocurrency company. Therefore the value of an equity token, like shares, depends on the performance of the company itself. It can be seen as a digital ownership of a share.71
Shares are defined in the Dutch Civil Code as rights that neither enclose a voting right nor an entitlement to a distribution of profits or reserves.72 To put it differently: shares must give
right to voting rights or entitlement to a distribution of a companies’ profits or reserves. This definition fits the equity tokens, seeing as equity tokens’ value depends on the performance of the company in terms of profit. Some cryptocurrency ecosystems also issue asset tokens. In my view, equity and asset tokens are synonymous. They are both represent a form of value backed by real assets.73
If an equity token is freely transferable, it can be exchanged. Dividends deriving from equity tokens are taxable events. Furthermore, capital gains made on trading interest are likewise taxable. An equity token can be stored and mined. These events will be taxed similar to the utility tokens, save for substantial interests. The specific manner of taxation will be
elaborated upon in the following chapter.
It can be argued that equity tokens can be equated to fiat money, seeing as currency bills are essentially a recognition of indebtedness to a government. It is possible to speculate and exchange in different kinds of equity tokens, like real-life currencies in order to hedge a profit. In my opinion, these endeavors fall within the scope of a derivative token, seeing as these tokens represent speculations such as options and futures on an underlying asset.74
2.4.1 Security Token
It should be noted that another token that can function like a share is a security token. A security token is usually purchased during an ICO. It gives the holder of the security token a right to the underlying cryptocurrency. Like equity tokens, its value can fluctuate depending on the popularity of the cryptocurrency.75 In the eyes of the American SEC and the Swiss
71 N. Moore & M. Higgins, ‘Navigating the Choppy Waters of Equity Tokens’, The Fintech Times, 9 July 2019, https://thefintechtimes.com/navigating-equity-tokens/.
72 Dutch Civil Code article 2:190.
73 Medipedia, ‘The Various Types of Crypto Tokens’, Medium 8 August 2018, https://medium.com/@medipedia/the-various-types-of-crypto-tokens-26bab8f6622c. 74 Zaki 2019
75 Coin Crunch, ‘Guide to Crypto Token Types’, Hackernoon 12 July 2018, https://hackernoon.com/guide-to-crypto-token-types-6ce04edaba72.
FINMA, these are can be classified (and thus regulated) like securities.76 The SEC
distinguishes security and utility tokens by means of the Howey test.77 Therefore, if a security
token shares the crucial characteristics of securities, it should be taxed in a similar fashion.
2.5 Coins, tokens and tax law
The classification of tokens in the abovementioned categories serve a purpose, seeing as they can roughly be translated to existing objects of taxation by means of their function. Utility tokens can be seen as a voucher, a form of money that can be realized upon exercising said voucher within the cryptocurrency ecosystem. Equity and asset tokens are similar to shares. Debt tokens essentially function like a short term debt.78 In view of their speculative nature,
derivative tokens and security tokens can be seen as a financial instrument.
All tokens described above have something in common: they represent a store of value. Ownership of tokens therefore lead to a financial standing. The idea of taxing according to ones wealth is an established concept, dating back to the father of modern economics Adam Smith: “The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”79 It
therefore stands to reason that tokens or coins representing value increases the respective abilities of persons, and these persons ought to contribute a share of this value to the government by means of taxes. This is an example of a fundamental Dutch tax principle, based on the ability to pay (draagkracht) which justifies proportional taxation. The ability to pay and other essential fiscal principles will be further elaborated upon in the following chapter.
76 D. Canellis, ‘Three Types of Cryptocurrency Tokens Explained as Quickly as Possible’, The Next Web, 19 November 2018, https://thenextweb.com/hardfork/2018/11/19/cryptocurrency-tokens-explained. Securities and Exchange Commission Securities Exchange Act of 1934 Release No. 81207 / July 25, 2017 Report of
Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO
77 ‘Making sense of Crypto Tokens Types’, Skalex (last accessed 28/1/20). E. Watson, ‘Utility Token Vs. Security Tokens: The Howey Test -The Viable Choice for Enhanced Protection in the Cryptosphere’,
CryptoGazette (accessed 26/1/2020) https://cryptogazette.com/utility-tokens-vs-security-tokens-the-howey-test-the-viable-choice-for-enhanced-protection-in-the-cryptosphere/.
78 ‘Utility, Equity, and Debt Tokens: an Overview for Institutional Investors’, Strategic Coin,
http://strategiccoin.com/utility-equity-debt-tokens-overview-institutional-investors/. Bal Derivs. & Fin. Instrums. 2018/20.2, par.2.
79 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, as cited on: S. Bowman, ‘Adam Smith and progressive taxation’, Adam Smith Institute 1 April 2011,
By identifying cryptocurrency tokens and equating these tokens to established legal objects, a natural person, transparent or non-transparent entity exchanging, storing, mining or paying with tokens can be taxed within the existing Dutch tax law. The application of fiscal law to cryptocurrency is the subject of chapter 3.
It should be noted that every cryptocurrency ecosystem can create its own tokens. The aforementioned types and subsets of tokens are defined for didactic purposes and can vary in their characteristics per cryptocurrency. If these tokens do not resemble existing taxable objects, they will not be liable to taxation.
Chapter 3: The Concept of Income in Dutch Tax Law
3.1 Introduction
The term taxation can be defined as a forced payment, founded on rules of law, of a person or entity to the government with no clear corresponding and reciprocal transaction of a
government to the persons subject to taxation.80 The rules of law can be traced back to article
104 of the Constitution for the Kingdom of the Netherlands, stipulating that taxes are allowed to be collected if its permitted by law. Netherlands is a civil law country, therefore the competence to levy direct taxes is defined within its national legislature.
The taxes that will be discussed are known as ‘direct taxes’; implying that taxes are levied directly from the person or entity subject to tax. In regard to these taxes, the object of taxation is some form of income. Therefore, the term income must be defined, in order to apply direct taxes to cryptocurrency tokens. As explained previously, the concept of income for tax purposes will be described in light the following cryptocurrency tokens: equity, utility, security, derivative and debt tokens.
The definitions of income will be prefaced by explaining the fundamental principles of tax law, illustrating the concept of income as regards direct taxes. The taxes discussed in this chapter will be the personal income tax, corporate income tax, dividend tax andthe proposed interest and royalty withholding tax. The concept of income in each of the taxes will be defined, where after it will be applied to the income generated from cryptocurrency tokens discussed in chapter 1.
3.2 Fundamental principles of fiscal income
The concept of income in Dutch tax law is moored to several fundamental principles of fiscal law. These principles grant the Dutch government the authority and legitimacy to tax persons and guide national tax processes to allow for fair and predictable treatment of income.81 The
principles relevant to direct taxation of cryptocurrency tokens will be discussed.
80 R.E.C.M. Niessen, ‘Algemene en bijzondere bronkenmerken’, WFR 1997/3, p. 32. 81 Gribnau 2007, par 3.6.
The principle of equality can be traced back to the first article of the Constitution for the Kingdom of the Netherlands. This principle provides that equal cases will be treated equally, and that unequal cases will be treated differently. Within fiscal law, a subset of the principle of equality is fiscal neutrality, entailing that similar economic activities should be subject to the same tax regime and rules. If cryptocurrency tokens are similar in function and economic characteristics to established objects of taxation, the tokens and said object should be taxed analogously. In a similar vein, the substance over form principle allows Tax Authorities and judges alike can treat constructions which economically perform the same functions as established taxable events equally. Dutch tax law is principle based, meaning that the economic reality is more determinative than technical formalities.82
A second principle is the ability to pay (draagkracht). It can be seen as an amalgamation of the principle of equality (everyone must be treated the same), and proportionality (the amount paid must be equally relative to the income enjoyed). This concept is exemplified in the Income Taxation Act, where income is progressively taxed according to one’s ability to pay.83
The ability to pay principle dates back to 1848, where John Stewart Mill explains that taxes should not be “imitating but […] redressing the inequalities and wrongs of nature”.84 This
means that the ones not able to create wealth for themselves should not have to pay the same share of taxes than ones that can. If cryptocurrency tokens represent wealth or an economic tradeable value, the persons or entities in possession of these tokens should be taxed on their economic value.
The principle of legality implies that the actors involved, including judges and Tax
Authorities, adhere to the written rule of law, and do not stray from these requirements, rules and standards. This implies that if the material characteristics of crypto tokens do not match established taxable objects, they will not be taxed similarly. Ergo, if crypto tokens cannot be classified as a source of income for direct taxes, they will therefore not be taxed.
These aforementioned principles are inherent to the system of taxation. They justify taxation, streamline its processes and imbue predictability for all actors involved. In accordance with these principles, it can be evaluated to what extent Dutch direct taxes apply to utility, equity 82 P. Snijders, ‘Substance over form, tenzij de wetgever anders beslist’, WFR 2014/774.
83 De Langen 1958, p. 682.
84 Mill, Principles of Political Economy, 1948, Book V, Chapter II.8 (available online) https://www.econlib.org/library/Mill/mlP.html?chapter_num=67#book-reader.
and debt tokens. This will shed a light on the lacunae in the current fiscal regime as regards cryptocurrency. Consequentially, new legislation should be enacted to supplement the current taxing guidelines for cryptocurrency.
3.3 Fiscal Income
As is described above, direct taxes base their taxation on income. The term income must be defined in order to identify taxable income derived from cryptocurrency tokens. Within the international sphere, the OECD Model Tax Convention (hereafter: MTC) covers income in article 2. In chapter 3 of the MTC, a number of income sources are named, such as income from immovable property, business profits, dividends, interest, royalty’s, capital gains pensions, entertainers and sportspersons and more. These sources are all classified as taxable income or capital. In view of international treaties, the MTC is a breed apart. This
international agreement functions by virtue of domestic law: it relies on domestic provisions and interpretations to function.85 In other words: the MTC coordinates two national tax laws,
with very few autonomous international substantive rules.86 These domestic rules apply to the
extent of the MTC formulated ‘distributive rule’.Income is not defined any further within the MTC. In my opinion this is logical seeing as it is unrealistic to define the same income definition for every state. Each state’s tax regimes can greatly differ. For this reason, the main focus of this thesis will be the Dutch income definition.
3.4 Personal income tax
The Dutch Income Taxation Act of 2001 (hereafter: ITA) is structured by source-theory (bronnentheorie). According to this source-theory, income derived from a source listed in the aforementioned Act is subject to personal income taxation.87 Within the Income Taxation Act
of 2001, income is divvied up into 3 income sources, namely, income resulting from labor and business (box 1), substantial interest (box 2) or savings and investments (box 3). Personal income tax is levied once a year, over the sum of boxes 1, 2 and 3 (article 2.3 ITA). The taxable income is income that has been realized from the aforementioned sources (het reële
85 De Pietro World Tax Journal 2015, p. 75. 86 De Pietro World Tax Journal 2015, p. 76.
87 J. P. Boer, ‘Bron van inkomen. Een onderzoek naar de invulling van het bronbegrip door de Hoge Raad’, NTFR 2015/759, p. 5.
stelsel).88 It should be noted that the order of the boxes should be followed when matching
income to a source.
The Dutch Supreme Court has formulated four requirements regarding the income definition. Income has to be created within the framework of the market economy. A transaction of goods and services within a family or friends milieu is excluded from income.89 Labor or
capital must be employed to garner income within the economy. Furthermore, the source intends to generate profit, thereby excluding hobbies and unremunerative occupations. Lastly, the source should objectively speaking be gainful, an intention to create something profitable is insufficient.90 Incidental profits can be classified as income.91 The foreseeability of profits
and thus the taxability of activities should be evaluated on the basis of facts and
circumstances every year, however, past years may also influence the objective foreseeability of profits.92
This definition of income in view of cryptocurrency endeavors begs the question: is this definition relevant and applicable to the technological environment in which cryptocurrency tokens and other forms of income is earned? A miner can invest in great processing capacity and a staker can invest in a larger reservoir of tokens in order to respectively mine and stake for reward. It is unclear if this investment will be earned back, for (positive) income to follow. Cryptocurrency ecosystems can either be unlimited or limited in their emission of coins. If these coins are limited, as is the case with Bitcoin, a fractionally decreasing reward per staking or mining job can be obtained. To add to this bleak entrepreneurial landscape, the mining and staking market is oversaturated, whereas credible cryptocurrencies are limited. Seeing as stakers and miners are remunerated in the cryptocurrency in which they work, volatile or unpopular cryptocurrencies are not worth investing in – thereby competing for the Bitcoins, Litecoins and Dogecoins of the cryptocurrency world.
In my opinion, the answer to classifying income in terms of cryptocurrency is more nuanced: cryptocurrency ecosystems which restrict cryptocurrency coins can be seen as a pyramid 88 This implies that assets which grow in value but are not sold are not taxable income (save for box 3 fixed return rate). Van Amsterdam e.a. 2013, p. 57.
89 HR 3 October 1990, ECLI:NL:HR:1990:BH7882, r.o. 4.3.
90 If investments or other costs are made to create a profitable business that fails before it creates profit, one could reason that the losses also qualify as negative income. HR 19 October 1955, ECLI:NL:HR:1955:AY2572. 91 A source does not have to be a regular or repeating event. Furthermore, an activity may start as a hobby, but the moment structural profits are intended by pursuing said hobby, it qualifies as taxable income.
scheme. The investors at the time of ICO or miners and stakers verifying blocks in the heyday of a cryptocurrency do enjoy a source of income. Their income can generally be expected. When the brunt of the cryptocurrency tokens have been distributed, income is meager and uncertain, therefore not meeting the requirements of income. This approach to income in view of pyramid schemes has been confirmed by the Dutch Supreme Court.93
Fiscal income is based on sound business practices is a fiscal term that encapsulates a host of other principles. It relies on business economics, except where business economics conflicts with fundamental fiscal principles.94 Sound business practices seek to set out a predictable
and sustainable pattern of behavior with which corporate income should be determined. Sound business practices include matching profits and corresponding losses, prudence, simplicity, realization and reality.95 These principles should be taken into account regardless
of the type of (cryptocurrency) business driven. This principle is not universally applicable – it does not apply to box 3.Neither do the aforementioned four requirements of labor and capital employed within the economy to subjectively and objectively attain profits have a bearing on box 3. Therefore, income in terms of the personal income tax will be treated per box per activity, seeing as certain income requirements do not apply to all boxes.
Cryptocurrency profits made by speculation are not a source of income in box 1.96 This is
logical, considering that one of the requirements of income is that fact that future profits are intended (subjectively) and to be reasonably expected (objectively). The state secretary of finance in the Netherlands notes that, given gyrating market values, cryptocurrency-related income is likely speculative.97 This implies that security and derivative tokens, if speculative,
will not be taxed in box 1. If, however, structural profits are realized, resulting profits will be counted towards income. The state secretary cautions that the fiscal classification of
cryptocurrency may be subject to change, in view of cryptocurrency’s speed of innovation.98
For the use of this paper, three categories in box 1 are of relevance: income from legal partnerships (winst uit onderneming), employment wage for natural person (loon) and income 93 HR 1 February 2002, ECLI:NL:HR:2002:AD8760.
94 Rapport van de Commissie GKG en IFRS 2015, p. 3. HR 8 mei 1957, ECLI:NL:HR:1957:AY2274.
95 ‘Doing Business in the Netherlands 2018’ PWC, p. 21. S.F.M. Niekel, ‘De grenzen van het realisatiebeginsel afgetast’, WFR 2004/1119, par. 4.
96 ‘Belastingheffing over cryptovaluta’, Kamer van Koophandel, https://www.kvk.nl/advies-en-informatie/financiering/belastingheffing-over-cryptovaluta/.
97 Kamerstukken I 2017/18, 34 775, AA, p. 6. 98 Kamerstukken I 2017/18, 34 775, AA, p. 7.
from other work (resultaat uit overige werkzaamheden). The sources of income from box 1 will be examined in their prescribed order of application (art. 3.1 ITA).
3.4.1 Box 1: Income derived from legal partnership
In addition to natural persons, are transparent entities can be liable to personal income tax. A transparent entity such as a legal partnership is characterized as a legal entity wherein the entrepreneurs are driving the business, are liable for debts incurred by said partnership and are able to make binding decisions on behalf of the partnership. The most basic form of this legal concept is an one-man business (eenmanszaak).99 Income is defined in article 3.8 ITA,
which defines income as any benefits derived from the legal partnership from its
incorporation to its liquidation. From article 3.8 ITA onwards, income generated by this partnership must be allocated to the relevant fiscal year in accordance with sound business practice (article 3.25 ITA).100 To illustrate sound business practice, prudence must be taken
into account when calculating taxable income. This means that reasonably expected losses should directly be deducted from taxable income but reasonably expected profits should not be added to taxable income until its realization.101 In accordance with sound business practice,
if a legal partnership owns cryptocurrency which functions like stock, in accordance with sound business practices, it must be valued at cost price or lower market value.102
An entrepreneur (ondernemer) who has a business must classify his income private or business, seeing as these two streams of income liable to different tax regimes
(vermogensetikettering). This distinction is not made in civil law, but serves as a means by which private and commercial costs can be taxed differently. For example, private uses should not be deductable from commercial income. This mandatory classification implies that each use of crypto tokens must be examined as to whether they are commercially traded, held, mined or payed with, or if they serve the private interests of the entrepreneurs.
Cryptocurrency can be received as a renumeration for a good or service. Value can be attributed to the underlying service or product to determine the taxable amount. The act of
99 This legal form is very easy to incorporate, seeing as it only requires registration with the Chambers of Commerce.
100 Van Amsterdam e.a. 2013, p. 72. HR 8 mei 1957, ECLI:NL:HR:1957:AY2274. 101 Van Amsterdam e.a. 2013, p. 72.
exchanging the cryptocurrency to fiat currency can additionally result in a profit or loss, which must be accounted for within the taxable income.
3.4.2 Box 1: Wage
One of the most prominent sources of income is wage. A natural person’s wage will be taxed progressively in line with one’s ability to pay (draagkracht). The most common form of wage is in fiat currency like euros. The Income Tax Act, in conjunction with the Wage Tax Act, provides guidelines to valuing wage in kind.103 All benefits deriving from employment
are taken into account when calculating personal income for box 1. Therefore, wage received in tokens is a taxable event.
If a person receives cryptocurrency as part of his wage, this will be classified as wage in kind, and the underlying value of the coins will be taxed. The economic value of the tokens (as is recorded on the coins’ exchange at the time of the transaction) or what persons receive for similar services and products can be used to determine the value of the coins for taxation purposes (article 3.144 ITA).104
3.4.3 Box 1: Income from other work
A natural person can also enjoy income from mining, staking and trading cryptocurrency whilst not constituting a legal partnership in box 1. This is known as income from other work. Unfortunately, favorable Dutch tax-deducting facilities are only applicable to those who run legal partnerships.105 The requirements of income from other work are fourfold: i) through
labor, a person ii) intends and iii) can reasonably be expected to create a profit iv) within an economic marketplace.106 The intention of creating profits cannot be speculative, nor passive.
In this regard, the derivative and security tokens cannot be taxed in box 1 if they are deemed speculative.
As regards income from other work, the State Secretary of Finance questions the profit intention cryptocurrency when mining. Given the fact that the amount of miners is on the rise and that in some cases like Bitcoin the profit for mining decreases gradually, a profit might 103 Exemptions and deductions on wage tax are not of relevance within the scope of this thesis.
104 Kamerstukken II 2009/10, 32 130, 3, p. 344.
105 For example, self-employed deduction (zelfstandigenaftrek) article 3.76 IB, SME profit exemption (Mkb-winstvrijstelling) 3.79a IB, discontinuation deduction (stakingsaftrek) article 3.79 IB and more.
