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Taxation of Virtual Currencies

Virtual currency is a new phenomenon. There is still uncertainty regarding its operation, status and legal consequences.

Aleksandra Bal
02 December 2014
Leiden University Repository

What is virtual currency?

The title of the PhD thesis is „Taxation of virtual currency”. Virtual currency is a currency that exists only in cyberspace and is not backed by any government. The most prominent example of virtual currency is Bitcoin.

Three questions

Virtual currency is a new phenomenon. There is still uncertainty regarding its operation, status and legal consequences. As a tax lawyer, I was interested in the tax consequences of using virtual currency. My research sought to answer three questions:

  • how virtual currency should be taxed;
  • how it is actually taxed;
  • what recommendations should be made to improve the current situation.

My thesis is the first book that provides a comprehensive examination of the tax treatment of virtual currency.

How should virtual currency be taxed?

With regard to the first question, my research concluded that virtual currency should not be subject to tax. There are many reasons to support this conclusion. First, you cannot pay taxes in virtual currency. To satisfy your tax liability, you would have to either sell your virtual currency or borrow money – both of which are contrary to the principle of neutrality, which says that the obligation to pay taxes should not force individuals to undertake any actions. Second, as virtual currency operates anonymously, tax authorities are not aware that someone owns it and cannot enforce the tax payment. Third, to calculate tax on your virtual income is an extremely complex task.

How is it actually taxed?

The second question was answered on the basis of a comparative analysis. I have examined the tax systems of four countries - Germany, the Netherlands, the United Kingdom and the United States. All countries under consideration would tax income in virtual currency. However, the mere fact that something is subject to tax on the basis of the law does not mean that it is actually taxed. People who have income in virtual currency do not pay tax on it for two reasons: either they are not aware that such income is taxable or they deliberately avoid paying tax knowing that their non-compliance will not be detected (virtual currencies operate anonymously). Ignored and unenforced law is useless as it neither generates any tax revenue for the state nor serves any other useful purpose.


In short, the conclusions of my research as are follows: although the general taxation principles imply that income in virtual currency should not be subject to tax, such income is actually taxable in many countries. This mismatch makes it necessary to issue laws to exempt it.

It is predicted that the use of virtual currencies will increase in the future. Therefore, it is important both tax authorities and taxpayers are prepared to deal with those currencies and to incorporate them into the existing legal framework.

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