This choice can be fiscally advantageous, as corporate tax rates are generally lower than the progressive rates of personal income tax. All income from cryptocurrencies within a company is taxed as profit, at a rate of 25%, or 20% for SMEs on profits up to €100,000.
In this article, we will delve deeper into the tax implications of conducting crypto-related activities within a company, with particular attention to the accounting classification, valuation, and tax treatment of cryptocurrencies acquired through mining.
Contribution of Cryptocurrencies to a Company
One key aspect to consider when incorporating cryptocurrencies into a company is that it may be more tax-efficient to start a new activity within the company. If existing cryptocurrencies are contributed to the company, this contribution could be considered a realization of the portfolio by the natural person contributing, leading to immediate taxation in personal income tax under Article 90, 1° of the Income Tax Code 1992 (WIB 1992). In this case, it may be advisable to request a tax ruling.
Tax Treatment of Crypto in Corporate Tax
Corporate tax treats all income, regardless of its source or nature, as professional income. This means that crypto-related income is always considered profit, which has tax implications for both the acquisition and realization of cryptocurrencies. Below, we will explore some key points related to crypto income.
Mining of Cryptocurrencies
Cryptocurrency mining is a complex process involving specialized hardware and software to validate transactions on a blockchain network. The reward for this is new cryptocurrencies granted to the miner. A crucial question is how this reward should be classified for tax purposes: as a self-produced asset or as payment in kind for the service provided to the network?
Taxable Income under Article 24, 1° WIB92: Primacy of Accounting Law
All income of a company is considered operating profit. This means that income from crypto mining falls under Article 24, 1° WIB 1992, which states that all income derived from the activities of a business is taxable as professional income. The company’s profit is determined by the increase in net assets during the taxable period.
According to established case law of the Court of Cassation, the taxable profit of a company must, in principle, be determined according to accounting rules. This means that the tax treatment of cryptocurrencies largely depends on how they are valued in the accounts. It is important to assess whether crypto mining can be considered a service for consideration.
A common view is that crypto mining is not a service for consideration, as there is no contractual relationship with a specific counterparty. The miner does not provide a direct service for which they can claim a reward in cryptocurrencies. This would imply that the received cryptocurrencies can be booked at their historical cost without immediate tax recognition of the result. Specifically, this would not lead to immediate taxation at the market value of the received cryptocurrencies.
An alternative view is that crypto mining should indeed be considered a service for consideration, with the received cryptocurrencies constituting payment in kind for the service provided to the network. In this case, the cryptocurrencies may need to be valued at their market value, potentially leading to immediate tax recognition of profit and, consequently, taxation.
At Aeacus Crypto Lawyers, we believe that crypto mining cannot be regarded as a service for consideration, meaning that immediate taxation at market value does not apply. Taxable profit will only arise when the mined coins are sold or exchanged for another coin.
In practice, we often see miners immediately exchange their mined coins for a stablecoin. In this case, there will indeed be direct tax recognition of profit, but this is due to the exchange of the mined coins for stablecoins rather than the mining of the coins itself.
Valuation and Tax Treatment of Cryptocurrencies
The valuation of cryptocurrencies is also a crucial aspect of their tax treatment. Accounting rules state that assets must generally be valued at their historical cost unless tax law provides otherwise. This means that cryptocurrencies mined by a company must be recorded based on the costs associated with the mining activities, such as electricity, server rental, and hardware depreciation.
A possible exception to this is when cryptocurrencies are considered payment in kind. In that case, there may be a reason to value the cryptocurrencies at their market value, which could result in immediate tax recognition of profit.
Realization of Cryptocurrencies and Capital Gains Tax
When cryptocurrencies are sold or converted into fiat currency (such as euros or dollars) or stablecoins by the company, a capital gain is realized, which is taxable under corporate tax. The capital gain is calculated as the difference between the selling price and the book value of the cryptocurrencies.
If, on the other hand, cryptocurrencies decrease in value, capital losses may be deductible under certain conditions. This can be the case, for example, when cryptocurrencies are recorded as current assets and the depreciation in value can be demonstrated.
Conclusion
Incorporating cryptocurrencies into a company can be fiscally attractive, provided the correct accounting and tax rules are followed. Whether cryptocurrencies are acquired through mining, as a means of payment, or by purchase, it is crucial to properly record and value them. Additionally, the tax treatment of capital gains and losses must be considered when realizing these assets.
The decision to conduct crypto-related activities within a company requires careful planning and a solid understanding of both the accounting and tax implications.
If you need assistance, please contact us to discuss your legal options. Appointments can be made via email or through our appointment page.
Christophe Romero Senne Verholle
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