Start taxing unrealized profits? — — The bill for the taxation system of actual returns in Box 3 was passed by the Dutch House of Representatives.

About a year ago, there was talk about taxing unrealized profits on $MSTR, at that time the MSTR was still showing unrealized gains, and some friends raised the question of whether taxing this part of the profit would force MSTR to sell its $BTC holdings, while in fact the United States does not have laws taxing unrealized profits.

But just yesterday, the Dutch House of Representatives passed the reform for Box 3, proposing to tax the "actual returns" on savings or investments at a rate of about 36%, where "actual returns" include price increases, which means taxing unrealized profits.

Of course, it still needs to pass the Senate and is expected to be implemented in 2028.

The main contents include:

A. Change from "presumed returns" to "actual returns".

Previously, Box 3 was taxed based on a "presumed return rate", the core of the new bill is to transform Box 3 into a system framework where "tax base is based on actual returns", meaning that taxes are paid based on the actual returns rather than wealth scale.

B. Tax base = cash returns + asset price changes (including unrealized gains and losses)

This time, the definition of "actual returns" does not look only at interest, dividends, and rent as cash flows, but also includes annual changes in asset value as part of returns.

Although it has not been sold, if the returns have increased, it still counts as part of that year's returns.

If it has decreased, it counts as a negative return.

Thus, it can be interpreted as "taxing unrealized profits", but more accurately it should be said to tax based on annual "asset appreciation or depreciation". Of course, even unrealized gains also require tax payments.

C. Tax rate about 36%, but not a 36% tax on assets

Here, the 36% is the tax on "taxable returns" in Box 3, not a tax on the principal or asset size. This means that if the returns for the year are 0, theoretically there will be no Box 3 tax, but there are still various details, tax exemptions, and calculation guidelines to consider.

D. Losses are allowed to carry forward, but can only be offset within Box 3

To make “counting unrealized gains and losses” logically valid, the bill introduces a loss mechanism for Box 3, allowing negative returns from the year to be carried forward to offset future positive returns (usually there will be thresholds or restrictions), but cannot be used to offset income from Box 1 or capital gains from Box 2.

Put simply, losses on paper can offset part of the paper gains from the following year, and currently, it does not appear to be simply calculated based on the calendar year.

E. Increased liquidity shock

The market's biggest concern is that if the asset increases but there is no cash to pay taxes, it may be forced to sell. This is the issue that needs to be faced.

F. Cryptocurrencies are explicitly included in the Box 3 asset category

If you are a Dutch tax resident, after this framework is implemented, holding cryptocurrencies like BTC or ETH will have their annual increases included in the tax base. Of course, if there is an annual decrease, it will also be counted as a loss.

Interpretation:

The biggest problem becomes, if this bill is implemented, then for example in 2023 and 2024, if Bitcoin is rising, taxes need to be paid for two consecutive years, and in order to pay taxes, one might have to reduce their position, only to find that by 2025 it is actually at a loss, resulting in a decreased position while also having paid taxes, leading to losses on both ends.

Some friends might think, isn't this good, helping you reduce your position and avoiding possible losses in the second year, but what if it continues to rise in the second year? For example, in the 2023 tax year, you sold $BTC to pay taxes, but then in 2024, the price rises even more, making you sell part of your BTC due to tax deductions.

Fortunately, this is only in the Netherlands; if it were in the United States, I believe $MSTR would really be crying. Taxing unrealized profits seems somewhat unethical, but from another perspective, unrealized profits can also be avoided through collateralized lending, and maybe more countries will implement similar schemes in the future.

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