Undeclared cryptocurrencies: practical advice on how to regularise your tax situation

Such a situation is very often explained by the fact that the investor invested modest sums in the cryptocurrency market a few years ago and did not declare them at the time. Today, they find themselves in possession of a portfolio of potentially a considerable value and facing unfortunately significant tax risks.

If you find yourself in this situation, here are the key questions to ask y ourself: 

• What are the tax risks if I do nothing?
• How can I regularise my tax situation before or at the same time as realising my gains?

What are the tax risks if I do nothing?

As cryptocurrencies form part of taxable assets and any income received or blocked (yield/reward, etc.) forms part of the taxable income of the individual private investor, these items must be declared in his / her tax return (N.B.: if the criteria for professional traders are met, capital gains are also subject to income tax and social security contributions). In general, the main issue is unpaid wealth tax in relation to undeclared crypto assets.

After realising gains of a certain size, investors who have not declared their crypto assets may no longer be able to justify their change in wealth position to the tax authorities. In other words, they will no longer be able to explain how their wealth has grown in such a way. This could lead to tax evasion proceedings being initiated against the investor. In this case, the investor  'at fault' could face the following sanctions:

• Recovery of the unpaid taxes over the last ten years (maximum);
• A fine of between one third and three times the amount of the unpaid taxes;
• Late payment interest.

The financial consequences can therefore be significant in some cases.

The good news is that there is a way to avoid these penalties, at least in part, under certain conditions.

How can I rectify my situation if my cryptocurrencies are not declared?

To avoid these heavy penalties, investors can consider the so-called spontaneous declaration procedure. Even if it is not possible to avoid the payment of the tax evaded and the late payment interest, the taxpayer will be exempted from the fine and will have regularised his situation once and for all. They will therefore be able to realise their generally tax-free gains (unless the professional securities dealer exception would apply) with complete peace of mind and without risking the opening of tax evasion proceedings.

In practice, this means contacting the tax authorities to disclose the income and assets that have been omitted. The taxpayer must therefore cooperate with the tax authorities in reconstructing the content of his portfolio as at 31 December of each year for the last ten years (maximum) for which the unpaid-tax recovery is valid.

In order to benefit from the voluntary disclosure procedure, all the following conditions must be met:

• It must be the taxpayer's first voluntary disclosure. If the taxpayer has already made a voluntary disclosure in the past, the procedure remains available, but a fine reduced to one fifth of the amount of tax evaded cannot be avoided.
• No tax authority may be aware of the facts / assets that are the subject of this voluntary disclosure. It is therefore too late if the tax authority already sent a request for information or if another tax authority is already aware of the omitted assets!
• The taxpayer must cooperate fully with the tax authorities in order to identify the assets and income that have been omitted.
• The taxpayer must pay the taxes due.

Conclusion

Investors who have not declared their cryptocurrencies usually only consider how to regularise their situation when they stand to make a substantial profit. Ideally, of course, investors should think about this as early as possible, even if they have no intention of making a profit immediately. Fortunately, the mechanism of spontaneous denunciation makes it possible to regularise one's situation under accessible conditions and thus avoid having to pay the fine. Ultimately, the main difficulty lies in reconstructing the content of your portfolio over the last ten years in order to provide the tax authorities with accurate data as part of the procedure.

In any case, the spontaneous declaration procedure allows to avoid a longer and more costly procedure initiated by the tax authorities, with all the risks that this may entail.  

Article written by Quentin Eiselé and Deborah Joye