In their 2020 Annual Report, the Ruling Commission briefly mentioned that under certain conditions ‘mining’ crypto assets can be considered to generate business income.
Miners receive cryptocurrencies as a reward for completing ‘blocks’ of verified transactions which are added to the blockchain. They verify transactions and are paid fees for doing so to keep the integrity of the crypto network. Mining does not necessarily result in receiving crypto assets and when it does, the miner will receive a claim. This claim will only be collected when converted into currency or by selling it.
Although the applicant initially only wanted to learn whether his activity could be considered a normal management of his privately held assets (in other words ‘a hobby’), the tax office quickly concluded that his crypto earnings should be taxed as business income instead.
In this specific case it concerned an IT-consultant who started mining about 10 years ago. Since a year or two, the applicant started selling his crypto assets on a monthly basis. Logically, the question came up whether such income would taxable and, if so, at what rate.
The Ruling Commission concluded that the income should be taxed as business income (at the progressive tax rates of 25% up to 50%) for the following reasons:
- Mining requires an active, constant monitoring of an activity focused on acquiring crypto assets;
- The taxpayer was active in the IT-sector;
- The taxpayer had been selling his mined crypto assets on a monthly basis since a year or two.
Before you can ‘mine’ crypto assets, you will need to buy specialised hardware and make it available to the mining pool. In this case, the mining process was fully automated and did not require any continuous monitoring or in person supervision.
While there is no fixed list of objective factors that indicates if an activity is carried out in an objectively businesslike manner, it will depend on the facts and circumstances of the individual miners whether their mining is more a hobby than a business. If you have a background in IT, blockchain technology, or computer hardware and you borrow money to pay for your mining rig, you are more likely to be treated as running a business than the average enthousiast mining from their personal computer at home.
The reasoning of the Belgian Ruling Commission is remarkable if we compare it to a previous decision of 5 December 2017 (Advance Decision nr. 2017.852). In this decision, the tax office ruled that the capital gain on the sale of crypto assets by means of an application developed by the taxpayer himself for the automatic buying and selling of crypto currency should not be considered business income because the software had only been developed “as a hobby and out of interest in his field of study”. However, given its ‘speculative’ character, it was considered to generate miscellaneous income, which is taxable at a flat rate of 33% (Newsflash of 12 April 2021).
It is a fact that mining crypto assets is the result of a successful mining operation. Such operations require special skill and organization of the individual miner. To derive crypto assets from mining activities, one must compete with other miners to solve a cryptographic puzzle. For this, specialized equipment is required. For the Belgian tax authorities, this is apparently an important element to consider it a business activity.
However, if we compare the two cases, they both use an automatic process with very limited human intervention, whereby both taxpayers used specialized software. In the 2017 decision, the taxpayer had even developed his own online platform to buy and sell crypto, while this was not applicable in the 2020 case. In our opinion, one could even argue that developing your own software requires an even greater set of skills. Especially, considering that hardware for automatically mining crypto can be easily bought online.
Furthermore, the earnings generated in the 2017 decision were continuously realized short term gains. While in the 2020 application, the miner held his crypto assets for a long time and only started selling them after a couple years. It was not clear from the information made available to us, but it is possible that the taxpayer had already discontinued his mining activities at that moment.
Although the ‘business income’-approach by the tax office can thus be challenged for several reasons, it also has an upside. If you are running a business, you will be able to claim deductions for business expenses and the depreciation of goods used in the business. This is important as the expenses associated with a commercial cryptocurrency mining operation for computers, electricity, rent and interest on loans can be significant.
The above shows once again that applying the existing general principles to everything involving cryptocurrencies continues to be a challenge. The position of the Belgian tax authorities in respect to these increasingly popular investment products remains a matter of case-by-case analysis.