The provision of cryptocurrency exchange services, wallet services, mining and platform services may be subject to VAT.
Gain is received
Income can be generated in different ways, for example:
- on the change in the price of cryptocurrency that occurred when selling or exchanging cryptocurrency to a regular currency or to another cryptocurrency
- when paying in cryptocurrencies for goods or services
- while cryptographic mining
- computer data rental
- cryptocurrency received as a wages payment
No gain is received
For example, income is not generated by:
- donating cryptocurrency
- buying cryptocurrency for a regular currency (euro, US dollar etc.)
- transferring cryptocurrencies between your electronic wallets
- gifting cryptocurrency
Income received in cryptocurrency (gains from the transfer of property, income from employment, business income) is taxed on a similar basis as income received in traditional currency.
As regards the taxation of virtual income, the purchase or sales price or received income has to be converted into euros at the exchange rate of cryptocurrency (market price) applying on the date of receipt of the income or costs.
Central rates of cryptocurrency can be found on the Cryptocurrency market site.
In the case of a transaction under market conditions, the exchange rate of the environment where the transaction takes place can be used as a market price. If the exchange rate of the environment where the transaction of cryptocurrency takes place, is given through any other traditional currency, e.g. USD, it is necessary to convert the amount of USD into euros using the daily exchange rate of the central bank on the website of Eesti Pank “Historical Exchange Rates”.
Declaration of income received in cryptocurrency
Within the meaning of subsection 15 (1) of the Income Tax Act, cryptocurrency is considered as property.
If a private person receives income from trade, purchase and sale of cryptocurrency or from the exchange of cryptocurrency against another crypto or traditional currency, the received income must be declared in the tables 6.3 or 8.3 of the income tax return as gains from transfer of other property.
The gain is calculated based on the transaction as the difference between the selling price and the purchase price, or, in the case of exchange, between the price of received property and the purchase price of the cryptocurrency.
Only the transactions that generated income have to be declared. In the taxation of property, each transfer transaction, including exchange, is considered as a separate object of taxation.
The transaction of transfer which caused loss can be taken into account for taxation purposes only in the case of transfer of securities on the terms and conditions provided by in § 39 of the Income Tax Act. Cryptocurrency is not considered as a security and loss suffered upon the exchange of cryptocurrency cannot be taken into account for taxation purposes. Therefore, it is not possible to declare such a transaction.
A natural person buys 2 litecoin for 260 euros, which he exchanges for 0.2 ethereum in a few months. At the time of the exchange, the market price of 2 litecoin has risen up to 500 euros. As the natural person has benefited from the exchange transaction in the amount of 240 euros (500 - 260), the natural person incurs into an obligation to declare and an income tax liability on the income earned, i.e. 240 euros.
In December 2017, the natural person buys 1 bitcoin for 11,000 euros. The natural person sells 1 bitcoin in December 2020 for 30,000 euros. As the natural person has received a gain of 19,000 euros (30,000 - 11,000), the natural person must declare the transaction and pay the income tax on the gain earned, i.e. 19,000 euros.
A natural person buys 1 ethereum for 1300 euros. Later the natural person decides to sell 1 ethereum for for 1000 euros. In this example, a natural person suffers a loss of 300 euros (1300 - 1000) from a transfer transaction. As the loss is not allowed to be taken into account by the natural person, this transaction is it is not an object to declaration.
Cryptocurrency can be used to pay for goods or services. If a natural person uses cryptocurrency to pay for goods and services, the gain received must be declared in Table 6.3 or 8.3 of the income tax return as a gain on the transfer of other assets.
The gain is calculated as the difference between the prices of the goods or services received and purchase price of cryptocurrency spent.
The natural person has 1 bitcoin, which he/she purchased in June 2017 for 2 500 euros. The natural person uses 1 bitcoin to buy a new car in December 2020. At the time of purchasing the car, the market price of 1 bitcoin increased to 30 000 euros. Thus, the natural person has received gain of 27 500 euros (30 000 - 2 500) from the car purchase.
The natural person must declare the gain received and pay income tax on it. The same taxation method applies to the acquisition of other goods and services (like food, machinery, beauty goods, etc.).
The mining of cryptocurrency is a business, which is treated equally as a production of goods for taxation purposes. The mined cryptocurrency is taxed on its transfer, i.e. when the mined cryptocurrency is converted into a common currency, exchanged to another cryptocurrency, or is used to pay for the products or services. Mined income must be declared in income tax return form E.
If a private person is independently engaged in cryptocurrency mining or data processing and income tax has not been withheld, the private person has to declare such income as business income and pay taxes based on the income tax return. A private person cannot deduct expenses incurred to obtain mining income (equipment, electricity).
A person who permanently mines cryptocurrency has to register as a sole proprietor or a company (legal entity) in the Business register. A registered sole proprietor may declare expenses (e.g. equipment) related to business and deduct them from business income. Income tax, social tax and contribution to mandatory funded pension must be paid on the net income from business according to the income tax return.
The sole proprietor must note that it is not possible to transfer cryptocurrency to the special account used for tax deferral.
The company can also take into account the costs related to the business. A company incurs a tax liability when it makes payments of salary, fringe benefits, dividends or non-business expenses.
Income derived from renting out the storage capacity of a private person’s computer must be declared in the income tax return of a natural person as rental income in table 5.4. If the lessee did not withhold income tax from the rental income, the private person shall declare the received rental income in part II of table 5.4 of the income tax return.
If cryptocurrency mining and renting out storage capacity is a business activity, the income from such business has to be declared on Form E as business income.
Employers registered in Estonia have to convert wages paid in cryptocurrency into euros at the current market price, and withhold and pay labour taxes on the payments made to employees.
If a natural person receives remuneration or service fee in cryptocurrency from which income tax is not withheld, for example from a foreign employer, then the person has to convert such income into euros at the current market price on the date of receipt of the cryptocurrency, and declare it as business income.
If the employer has already withheld taxes on the wages received in cryptocurrency, the cryptocurrency can be used for purchasing various goods or services without any additional tax liabilities. If the employee decides to reinvest taxed cryptocurrency, then each subsequent profitable transaction will be a subject to declaration and taxation.
If a dividend is paid in cryptocurrency, it is treated at the level of the recipient as a dividend received in euro:
- if a company has paid income tax on the dividend, there is no additional income tax liability for the private person;
- if a company has not paid income tax on the dividend or on the share of the profit on which it is based, the recipient of the dividend must pay the income tax by means of an income tax return. There is no additional tax liability for the use of such dividend for the purchase of goods or services.
In other types of virtual assets
However, if a company has distributed dividends in other types of virtual assets, the rules on the transfer of assets will apply to the subsequent sale/exchange of the assets. This means that the recipient of a dividend can take the value of the dividend taxed at a company level into account as the acquisition cost and deduct it from the proceeds from the sale or exchange of those assets. Profits arising from the sale/exchange of assets are taxable.
A natural person's cryptocurrency wallet will receive 0.05 bitcoin as a February wages payment from the company X. Company X declared the wages paid to the person in company's February TSD declaration Annex 1.
The natural person decides spend half of the wage received to pay for the goods and services. The natural person has no obligation to declare 0.025 bitcoin transfer for the goods and services, because cryptocurrency was already taxed with labour taxes. The other 0.025 bitcoin natural person decides to reinvest and buys for it new cryptocurrency. In this case, if the natural person decides to reinvest the taxed cryptocurrency, then each subsequent profitable transaction will be a subject to declaration and taxation.
The Estonian Tax and Customs Board is of the opinion that a distinction must be made between cryptocurrency transactions made on behalf of a person and a company. This is because a person (natural person) and a company (legal person) are subjects to different taxation rules:
- if the cryptocurrency transactions have been made on behalf of a natural person, then the person is also obliged to declare profitable transactions. A natural person incurs a tax liability on the basis of an income tax return of a resident natural person.
- if the cryptocurrency transactions have been made on behalf of the company, the transactions must be accounted for and taxed in accordance with the company's tax rules. A company incurs a tax liability when making payments of salary income, fringe benefits, dividends or non-business expenses. Such payments must be declared in the TSD declaration form.
A member of the management board is the legal representative of the company and the cryptocurrency transactions made by a member of the management board are performed on behalf of the company. Making a cryptocurrency transaction requires an account / wallet. Therefore, in order to make a cryptocurrency transaction on behalf of a company (legal entity), it is mandatory to open an account / wallet on behalf of the company.
The Estonian Tax and Customs Board is of the opinion that an agency contract regulated by the Law of Obligations Act belongs to the contracts for the provision of services (authorisation agreement). An agency contract is characterised and distinguished from other similar contracts by the agent's independent and permanent obligation to mediate or enter into contracts in the name and on behalf of another person (the mandatary). Despite the fact that the agent is acting independently, agent is permanently acting for the mandatary and while being bound by the duty of loyalty, the agent is similar to an employee.
This means that when a company signs the agency contract with a person (a contract for the provision of an agency-type service), the person, who is acting as an agent, does not make transactions in his own name, but in the name, in the interests and for the benefit of the company that gave him the mandate. The relationship of a member of the management board with a legal person is also considered a special form of the agency agreement. A member of the management board also enters into agreements in the name and on behalf of the company.
The purchase and sale of cryptocurrency made both by the agent (on basis of agency contract) and directly by the company must be recorded in the company's account / wallet.
NB! At the training of the Estonian Cryptocurrency Union on April 29, 2021, the position of the Estonian Tax and Customs Board was erroneous. It was said that the company might use a private person's (agent's) account / wallet for cryptocurrency transactions based on an agency contract. A company that has used an agency contract and a private (agent) wallet due to training can exceptionally record agent’s transactions performed in agent´s natural person´s wallet as company transactions. For the future transactions, company must open business crypto wallet in the company name.
If a natural person decides to start or to continue investing in cryptocurrency as a company (legal entity), he/she must take into account the tax rules of the company.
A resident company pays income tax on the distribution of profits, i.e. on the payment of a dividend at the rate of 20/80. Benefits granted by the employer (fringe benefits) to employees are subject to income tax at the rate of 20/80 and social tax at the rate of 33%. Expenses or payments made by a resident company, which are not related to the company’s business, are subject to income tax at the rate of 20/80.
Questions and answers
1. Can I use an investment account for the cryptocurrency transactions?
Cryptocurrency does not qualify as a financial asset within the meaning of subsection 17¹ (2) of the Income Tax Act. For that reason, it is not possible to postpone a natural person's tax liability through an investment account.
2. For cryptocurrency transactions, is it possible to declare only the income actually received in the bank account?
Income tax is levied on all profitable transactions in cryptocurrencies, including buying-selling or exchanging a cryptocurrency for another cryptocurrency. The gain of exchanging a cryptocurrency is the difference between the acquisition cost of the cryptocurrency to be exchanged and the market price of the cryptocurrency received through the exchange (subsection 37 (1) of the Income Tax Act). Thus, income received through exchanging a cryptocurrency and not converted into a regular currency is also subject to declaration in Table 6.3 or 8.3 of the income tax return.
3. Are exchange euro prices suitable for calculating euro values (if, for example, I invest/trade in Binance exchange platform, then will Binance exchange plaform euro exchange rates apply)?
Yes. In the case of a transaction made under market conditions, the exchange rate of the environment where the transaction took place can be used as a market price.
4. I do not know the acquisition cost and sale price of the cryptocurrency, what should I declare?
If an individual receives income from trading, buying or selling or exchanging a cryptocurrency for another cryptocurrency or a regular currency, the income received must be declared in Table 6.3 or 8.3 of the income tax return as gain from transfer of other property.
The gain is calculated on a transaction-by-transaction basis as the difference between the selling price and the purchase price of the cryptocurrency or in the case of exchange, between the price of received cryptocurrency and the purchase price of the cryptocurrency. This means that every profitable transaction is a subject to declaration and income tax. The Income Tax Act does not allow the calculation of profit from the transfer of cryptocurrencies as daily turnover, because it can include also unprofitable transactions. The calculation must be made for each profitable transaction separately.
5. If I get a salary in cryptocurrency, whether I have to pay income tax on exchanging it with a regular currency?
A person does not incur a declaration obligation if he or she transfers (exchanging for crypto or ordinary currency or purchasing goods and services) the cryptocurrency received as remuneration, which was a subject to labour taxes in Estonia.
If a person invests cryptocurrency, which was a subject to labour taxes in Estonia, and benefits from the investment, then the profitable transactions should be declared in Table 6.3 or 8.3 of the income tax return.
6. If I use a robot that makes transactions with a small value of cryptocurrency, which ends up with lots of transactions during one day. In this case, it impossible, to record profit of individual transactions. For example, I buy 2 and 2 units of a cryptocurrency and sell 3 and 1 cryptocurrency, so how to determine the profit of individual sales transactions, if not in total?
Cryptocurrency is not considered a security and losses resulting from the exchange of cryptocurrency cannot be taken into account for tax purposes. Therefore, it is not possible to declare such a transaction. If the robot or broker only makes profitable transactions, then you can calculate the daily profit in total, but when declaring cryptocurrency transactions, the acquisition cost and sale price of the transferred property must be taken into account.
Upon transfer of cryptocurrency, in addition to the acquisition cost, the certified expenses directly related to the sale or exchange of cryptocurrency (e.g. transaction fees, etc.) may also be deducted from the sales price. This supposes that the taxpayer keeps records of his cryptocurrencies 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 cryptocurrency to a company and then later company returns borrowed cryptocurrency to the natural person. For example, I borrow 2 BTC (Bitcoin) and the company later returns 2 BTC to me. Does an individual (a lender) incur an income tax liability?
If an individual lends 2 BTC to a company on the basis of 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 me 1.06 BTC, what and where I have to declare?
If a person lends 1 BTC and receives back 0.06 BTC more, the interest received on the loan lent to the natural person is subject to declaration in Table 5.6 of the income tax return.
Interest income is a subject to declaration on the income tax return corresponding to the year of interest receipt. A natural person declares gained interest (which value is a market price at the time of receiving 0.06 BTC) in euros.
Last updated: 19.01.2022