A few exceptions aside, Belgium normally does not tax private capital gains. The gains realized by a private individual are not taxable, if this takes place within the ‘normal’ management of their privately held assets and are not part of any business activity. In the absence of a legal framework for cryptos in Belgium, this approach also applies to capital gains realized on cryptocurrencies and other digital assets.
A capital gain is the positive difference between the sale price of an asset and its initial purchase price, which is basically triggered when an asset is sold. In general, only the exchange of cryptocurrency into fiat money generates a capital gain. However, according to the Belgian Tax Authorities, the exchange of cryptocurrency for another cryptocurrency can also be considered a realisation and trigger a taxation in Belgium.
This conclusion is based on a position first taken by the Tax Ruling Commission in Belgium. This department allows taxpayers to obtain an advance decision from the tax authorities in respect to the application of our domestic tax laws to a particular situation or transaction. Almost all matters relating to direct, indirect and international taxation can be the subject of a ruling request. It is basically the only department where taxpayers can present their case to and get some clarity on the tax treatment of their crypto investments.
Tax Ruling Commission
In the past, when requesting a tax ruling for crypto assets, several taxpayers were faced with an important condition of inadmissibility. It is common knowledge that a ruling can only be requested for a situation or transaction that has not yet had any fiscal effect (i.e. ‘preliminary character’ of the application). Otherwise it would obviously not be an advance decision.
On their website, the Ruling Commission states: “Have you sold crypto currency in the past few years or made conversions from one crypto currency to another crypto currency, then it will be assessed on a case-by-case basis whether the prior nature of the application has been violated and whether or not a valid ruling decision can still be issued”.
The tax office therefore suggests that a crypto-to-crypto conversion can be considered to create certain tax consequences that may render a ruling request inadmissible. It can only be applied for if it is essentially ‘prior’ in nature. This means that it must relate to a transaction that has not yet had any tax implications.
The first question one should ask is whether a capital gain for tax purposes has effectively been realized. In other words, is the crypto-to-crypto transaction a taxable event or not? What about the situation where a capital loss was realized and there is no taxable capital gain?
The second question is whether this type of realization results in an actual taxation (i.e. as business income, speculative income or as a tax-exempt private gain)? The answer to this will vary depending on the specific situation of the investor. Only in case of a private capital gain, there will be no taxation.
Thirdly, the taxable basis should also be determined. This involves assessing the capital gain based on various valuation methods, such as LIFO (Last In First Out), FIFO (First in First Out) or a Weighted Average. And how do you apply this when you, for example, only use a portion of your BTC to buy ETH or USDC?
Finance Minister’s view
Until now, there has been no clear communication from the Belgian tax authorities on this topic. However, on 9 March 2023, the Finance Minister stated that:
“A capital gain is considered to have been realized when an asset leaves a person’s estate in exchange for fiat currency or in exchange for another asset, such as another crypto currency. Evidently, a capital gain occurs when the realization generates an increase in wealth.
Thus, the realization does not ipso facto imply a consideration in fiat currency. When a capital gain is the result of an exchange of one asset for another one, such as, for example, a crypto currency A against a crypto currency B, this capital gain is ‘realized’ and not ‘deferred”.
In other words, when you use your BTC to buy ETH, for example, you are deemed to have technically realized your BTC before you buy ETH as a new asset. This realization is indeed considered to be taxable, according to the Finance Minister. You will owe taxes if the value of your BTC at that moment exceeds the amount you paid when you first acquired your BTC.
This may look like a straightforward standpoint, but it absolutely isn’t.
The question is how one can avoid a potential double taxation that may arise from the subsequent exchange of those crypto assets for fiat currency? How will a loss in value on the exchange of crypto assets for fiat money be treated for tax purposes? What about the situation in which certain crypto-to-crypto conversions took place before the investor became a Belgian tax resident? The concept of deferred capital gain is used for certain other types of assets; why should a different tax principle apply to crypto assets? It is a fact that many questions remain after the recent intervention by the Finance Minister.
The official position of the Belgian Tax Authorities can obviously be challenged before the courts, but it is very likely that they will follow the Finance Minister’s instruction. It is therefore crucial to take the necessary steps to protect your crypto investments from any adverse tax consequences.
Following the Finance Minister’s answer, crypto investors may be asked to pay income tax on deferred capital gains without having realized any additional fiat currency as a result of it.
Taxpayers with insufficient liquidity, may be forced to change their investment strategy and sell their crypto just to be able to settle their taxes. This can result in dramatic situations when certain crypto assets have completely dropped in value, even below the tax amount that the investor needs to pay. Whereas certain crypto-to-crypto gains may have been substantial before, investors could be confronted with the situation in which they are simply not able to pay their taxes.
We also know that transferring crypto profits to your bank account can be a complicated and challenging task these days, as the process of verifying the legal source of the funds by the bank takes time. In worst case, Belgian banks often simply refuse to accept the funds. How the taxpayer is expected to pay the tax due if he cannot access his money?
Different investment strategy
Crypto investors in Belgium are urgently in need of clear administrative guidelines from the tax authorities. Maybe no fully-fledged legal framework, but at least some minimum guidelines so investors know where they stand. Taxpayers are entitled to legal certainty so they can invest in crypto with peace of mind.
In the absence thereof, many taxpayers have applied in good faith the standard tax rules to their crypto investments assuming that capital gains would only be calculated (and income tax would only be due) when exchanged against fiat currency.
It should not come as a surprise that practically nobody reported their deferred capital gains in the past. If you want to come clean with the tax authorities, you could consider doing an additional reporting (even for previous years) and settle the taxes due. Once again, Belgian taxpayers will need to bear the consequences of the indifference of the Belgian taxman, who should have clarified this issue already a long time ago.
Soon DAC8 will become operational within the EU, which will require crypto-asset service providers to report transactions made by EU clients to the tax authorities. In other words, it is only a matter of time before the authorities will be notified of your crypto transactions.
If you are just going to sit back, relax and wait until the taxman sends you a question for information, it may already be too late. For those actively investing in crypto, it is important to take the above into account, potentially adjust your investment strategy and anticipate having sufficient liquidity to pay your taxes when the bill arrives.