Taxation of personal income in virtual currency / cryptocurrency
Earning income with virtual currency / cryptocurrency (eg bitcoin, etc.) through different environments has become a new way of earning income. We explain below how an individual must declare income received in virtual currency.
Revenue can be generated in different ways, for example:
- changing the price of a virtual currency by buying and selling / exchanging a virtual currency
- the so-called mining of virtual currency
- computer data rental
- receiving payment in virtual currency for the work done
Income received in the virtual currency (gains from the transfer of assets, salary income, business income) is taxed on the same principles as income received in the traditional currency. When taxing income, the purchase and sale price of the virtual currency or the income received must be converted into euros on the basis of the virtual currency exchange rate (market price) valid on the date of receipt of the income or expenditure.
The market overview here is helpful in finding the average exchange rate for a virtual currency.
In the case of a transaction under market conditions, the exchange rate of the environment in which the transaction took place may also be used as the market price. If the exchange rate is given in another traditional currency in the virtual currency transaction environment, eg USD, the USD amount must be converted into euros using the central bank’s daily exchange rate on Eesti Pank’s website “Euro exchange rate history” .
Buying or exchanging virtual currency
Virtual currency is treated as an asset within the meaning of § 15 (1 ) of the Income Tax Act (TuMS).
If an individual receives income from trading, buying or selling or exchanging a virtual currency for another virtual currency or a common currency, the income received must be declared in Table 6.3 or 8.3 of the income statement as a gain on the transfer of other assets.
The benefit is calculated on the basis of the transaction between the selling price and the purchase price of the virtual currency or between the price of the asset received in exchange and the purchase price of the virtual currency being exchanged.
Only sales or exchanges that have benefited need to be declared. Each transfer transaction, including an exchange transaction, is treated as a separate tax object for tax purposes.
A transfer transaction which resulted in a loss can be taken into account for tax purposes only in the case of transfer of securities under the conditions provided for in § 39 of the TuMS. Virtual currency is not considered a security and losses resulting from the exchange of virtual currency cannot be taken into account for tax purposes and such a transaction cannot be declared. Due to the above, the economic risks in the event of a decrease in the value of virtual currency are borne by the person. The Financial Supervision Authority published 5. February 2014 also warns virtual currency users on its website “Virtual money providers are not subject to supervision”
The mining of cryptocurrencies is a business and is treated equally with the production of goods for taxation purposes (§ 14 (2), §§ 32–35 and 47 and partly §§ 36–38 of the TuMS). The mined cryptocurrency is taxed on its transfer, ie when the mined cryptocurrency is converted into a common currency, exchanged for another cryptocurrency or taken into consumption. Mining income is declared on income tax return form E.
If a private individual mines cryptocurrency, the private individual must declare the income received as business income and pay taxes on it on the basis of the income tax return. Expenses incurred to obtain mining income (equipment, electricity costs) cannot be deducted by an individual.
A person permanently engaged in cryptocurrency must register in the commercial register and be self-employed or through a company. A registered self-employed person can also deduct from the business income and declare the expenses incurred to obtain the business income (for example, equipment, electricity costs). On the basis of the income tax return, income tax, social tax and the obligated person must also pay the mandatory funded pension on the net income of the enterprise.
Computer data rental
Revenue from the rental of personal computer data must be declared in Table 7.3. as rental income. If the mining of cryptocurrencies and the rental of computer data is a business, then the income from the rental of computer data must be declared in Form E as business income.
Remuneration for work in virtual currency
An Estonian employer must convert wages paid in virtual currency into euros on the basis of the market price and withhold and pay labor taxes on the wages paid.
If an individual receives remuneration in a virtual currency from which the tax has not been withheld, for example from a foreign employer, the person must convert this income into euros on the basis of the market price on the date of receipt of the cryptocurrency and declare the income as business income. The use of income received in virtual currency already taxed as wages for the purchase of various goods or services no longer entails additional tax liability.
Exchanging virtual currency for traditional currency and vice versa is exempt from VAT, similar to traditional currency exchange transactions. Thus, dealing with virtual currency, including mining, does not entail a VAT liability or an obligation to register for VAT. Irrespective of whether the payment is agreed in a virtual currency or in another currency, the normal VAT rules apply to the goods or services.
Questions and answers
1. Can an investment account be used for cryptocurrency transactions?
The cryptocurrency does not qualify as a financial asset within the meaning of § 17¹ (2) of the TuMS, therefore the deferral of the tax liability of a natural person through an investment account is excluded.
2. In the case of cryptocurrency transactions, can only the income actually received in the bank account be declared?
Income tax is levied on all profitable transactions in cryptocurrencies, including buying-selling or exchanging virtual currency for another virtual currency. The benefit from the exchange of an asset is the difference between the acquisition cost of the asset being exchanged and the market price of the asset received in exchange (§ 37 (1) TuMS). As a result, income received as a result of exchanging cryptocurrencies that has not been converted into a regular currency is also subject to declaration in Table 6.3 or 8.3 of the income statement.
3. Is the euro exchange rate of the Binance exchange environment suitable for calculating euro values (if, for example, I invest / trade in the Binance exchange environment, the euro exchange rate of the Binance exchange environment)? “
Yes, in the case of a transaction under market conditions, the exchange rate of the environment in which the transaction took place may also be used as the market price.
4. I do not know the purchase price and sale price of the cryptocurrency, which I declare?
If an individual receives income from trading, buying or selling or exchanging a virtual currency for another virtual currency or a common currency, the income received must be declared in Table 6.3 or 8.3 of the income statement as a gain on the transfer of other assets. The benefit is calculated on the basis of the transaction between the selling price and the purchase price of the virtual currency or between the price of the asset received in exchange and the purchase price of the virtual currency being exchanged. This means that every profitable transaction is subject to declaration and income tax. The Income Tax Act does not allow the benefit of the transfer of assets to be calculated as daily turnover, as the calculation must be made for each profitable transaction.
5. If I receive a salary in cryptocurrency, do I have to pay income tax when I change it to regular currency?
A person does not have to declare if he or she transfers (exchanging for virtual or regular currency or purchasing goods and services) the cryptocurrency received as remuneration, which is subject to labor taxes. If a person invests in a cryptocurrency subject to labor taxes and benefits from the investment, the profitable transactions are to be declared in Table 6.3 or 8.3 of the income statement as a gain on the transfer of other assets.
6. If I use a robot that constantly trades with small amounts, adding or subtracting, then I can’t determine the profit of individual trades just by withdrawing money from the portal. For example, I buy 2 and 2 units of a crypt and sell 3 and 1 crypt, so how to determine the profit of individual sales, if not the sum?
Virtual currency is not considered a security and losses resulting from the exchange of virtual currency cannot be taken into account for tax purposes. If the robot or broker only makes profitable transactions for you, then you can calculate the daily benefit in total, but when declaring cryptocurrency transactions, the acquisition cost and sale price of the transferred property must be taken into account. Upon the transfer of a cryptocurrency, in addition to the acquisition cost, the right to deduct documented expenses directly related to the sale or exchange of the asset, such as transaction fees, etc., may be deducted from the sale price. This presupposes that the taxpayer keeps records of these assets throughout the year.
Although the Income Tax Act does not provide simplified methods for calculating the acquisition cost of foreign exchange transactions, we understand that for a large number of transactions, it is difficult to account for the acquisition cost of each individual cryptocurrency. Therefore, we accept the use of the FIFO method to calculate the acquisition cost.
7. If a natural person lends a cryptocurrency to a company and it is returned later in the cryptocurrency. For example, I borrow 2 BTC (bitcoin) and the company never returns 2 BTC to me. Does an individual or borrower incur an income tax liability?
If an individual lends 2 BTC to a company under a loan agreement and the company returns 2 BTC to an individual, the individual does not incur a tax liability.
8. If I lend 1 BTC to a friend and he returns 1.06 BTC, what and where do I have to declare?
If a person borrows 1 BTC and receives back 0.06 BTC more, the interest received on the loan granted to a private person is subject to declaration in Table 5.6 of the income tax return. Interest income is subject to declaration on the income tax return of a natural person corresponding to the year of its receipt. As the interest income received is declared in euros, the interest income received is 0.06 BTC in euros at the time of receiving the interest.