Legal Aspects of Blockchain

In this article we provide an overview of the legal aspects that play a role in the blockchain and cryptocurrency. This is a playing field of innovative people/companies and lawyers who have or are gaining knowledge of the new subject matter. It is important that the knowledge is ultimately incorporated by the legislator into legislation that is practically useful for the user and supplier of the new developments. Realizable supervision is indispensable in this regard.

Table of Contents

Taxes on Cryptocurrency in the Netherlands

Cryptocurrency, such as bitcoins, are digital means of exchange where no central counterparty such as a bank is involved. Most transactions in cryptocurrency take place through so-called exchange platforms where you can purchase or exchange cryptocurrency for regular money. You can also acquire cryptocurrency through mining.

How you have to file taxes for cryptocurrency depends on your situation. In this article, we will discuss how taxes on cryptocurrency work for Dutch users.

Possession of Cryptocurrency

As an individual and owner of cryptocurrency, these belong to your assets in box 3. You must report the value of your cryptocurrency in economic terms on January 1 (reference date). You must use the exchange rate on the reference date of the used exchange platform.

Mining and Trading Cryptocurrency

Mining requires a lot of computer power. The costs associated with this will often be so high that there will rarely be an advantage. Therefore, you do not have to report the mining income yourself. This changes if your income is higher than your costs. In that case, there may be income from other work or profit from a business and you must report your income in your tax return.

Trading cryptocurrency can be compared to trading in regular currencies such as Japanese Yen or US dollars. You are investing and speculating on exchange rate gains. You do not have to report the trading income. This is different if you earn extra income with extra work, in addition to your investment activities, often. In that case, you must report the income. Report these incomes as income from other work or as profit from a business.

Income in Cryptocurrency

As an individual and recipient of your income in cryptocurrency, your employer must convert the cryptocurrency into euros at the time you receive it. This is considered in-kind income.

Businesses and Payment in Cryptocurrency

As a business for income tax and paid in cryptocurrency, you must convert this to euros. The converted amount is included in your revenue. When exchanging the cryptocurrency, you can make a profit or loss. This is reflected in your income statement. Do you still have cryptocurrency on the balance sheet date? Then value it at cost or lower market value.

If you buy cryptocurrency as a business, it only belongs to your business assets if you make the purchase within normal business operations. In all other cases, the purchase belongs to private assets and is taxed as assets in box 3.

It is important to be aware of the rules and regulations regarding cryptocurrency and how they must be reported to the tax authorities. It is recommended to seek professional advice if you have doubts about how to fill out your tax return. This way you can avoid paying unnecessary taxes or getting into trouble with the tax authorities.

What is Blockchain

A blockchain is a system that can be used to record data. This can be, for example, transfers such as those that are possible at a regular bank, but can also contain deeds of ownership, agreements, personal messages or other data. The special thing about the blockchain is that this is possible without a central authority, so that falsifying the recorded data is not possible by corrupting one central point.

A blockchain consists of a chain of data recorded and combined in the computer or on the internet, called blocks. The chain of data, of the data, is determined by the order in which the data is added.

A blockchain is a distributed database, which means that more parties, operating from their node, have a copy and are working on maintaining the chain, and checking each other. A blockchain can be public, which often goes hand in hand with the ability for anyone to act as a node. This requires special provisions to provide protection against manipulation and counterfeiting. A blockchain can also be closed, where an authority or fixed rules determine who is or can become a node.

Which elements play a role in achieving proper legislation and supervision in the ”Blockchain World”?

Creating trust

Blockchain is the technology behind the cryptocurrency. This is an unknown world for many people. Due to the volatility of this cryptocurrency and the fact that there are many ”cowboys” working in this world, there are many people who struggle to believe in this technique. This has to be done by being patient, by creating a good ‘use case’, but above all by continuing to give explanations.

Realizing workable legislation with proper supervision is also an important part of realizing this trust.

Smart Contracts

Blockchain Technology offers, among other things, the possibility to implement ‘smart contracts’. A so-called ‘consensus protocol’ is then laid down in the code. It follows from this protocol that those involved agree to the implementation of subsequent actions, if certain conditions are met. The subsequent actions are performed by a network of computers, without the risk that one of the parties involved will not comply with the agreements. Because the tasks are performed automatically instead of manually, the speed of the transaction is increased and the number of errors due to human actions is reduced. In order to facilitate these digital agreements, it is relevant that the network of computers is continuously available. The unavailability of one of the computers in the network could otherwise ensure that a transaction does not take place or does not take place on time, with all the associated consequences. The contractual agreements regarding the exploitation of this network of computers are therefore important.

In addition, a ‘smart contract’ also raises other legal questions, such as:

  • When is there a consensus?
  • Is there the same ”level of understanding” on both sides of the transaction? After all, transactions can take place worldwide.
  • When does an automated transaction qualify as a legal agreement?
  • What are the legal consequences if the underlying technology of a smart contract contains errors (for example, coding errors) and who is liable for this?
  • What happens in the event of insolvency and bankruptcy?
  • How do we deal with changing legislation at both national and international level (financial and legal)?

It will be clear that it is important that the legal and regulatory aspects of the smart contract options are already considered at the ‘front end”, during development. This means ”forward thinking” and not ”thinking”.

Data Protection

(Privacy) and Transparency
In a public blockchain network, there is currently no clearly identifiable party or person responsible for protecting and preserving data. In such situations, the blockchain contains a large number of information nodes, which are often spread over several countries and managed by several owners, whether anonymous or not. Without regulations that clearly prescribe who is responsible for what, it becomes very opaque.

There are already lawyers who argue that blockchain conflicts with privacy rules (such as those that apply from 21 May 20018 within the EC). One possibility would be to not process personal data within the blockchain but outside it.

It is important to assess the privacy aspect already during the design and development of the blockchain and not afterwards.

Multiple countries with different laws and different supervision

Blockchain crosses borders. This while the legislation and supervision per country or community (eg EC) is determined. To achieve the necessary trust, good usable applications are needed, but also applicable and verifiable legislation by regulators. This will have to be coordinated in the coming years to make blockchain technology truly possible worldwide. A big challenge!!

Conclusion

Do these legal aspects mean that we should not take advantage of the opportunities that blockchain offers us? The technology is still in its infancy but already shows enormous potential. For lawyers and legislators, these are some of the hurdles to explore in order to become familiar with the technology itself. Much can be achieved in the coming years by collaborating with the developers. It is important that developers of new Blockchain applications take the above legal aspects into account during the development process. If all this succeeds, trust can be created step by step and proof can also be provided with so-called ”use cases”.

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