Taxable income received in cryptocurrency, such as rent, interest, business income, etc., is also subject to income tax. The article explains in which cases a natural person must declare income received in cryptocurrency. The term "cryptocurrency" refers to the exchange currency used, for example, for the sale / purchase of goods or services, as well as for investments aimed at maintaining or increasing the value of cryptocurrency. Cryptocurrency includes, for example, Bitcoin, Ether, Litecoin, etc.
The provision of cryptocurrency swaps, wallet services, mining and platform services may be subject to VAT.
Gain is received
Income can be generated in different ways, for example:
- by a change in the price of cryptocurrency in the event of the sale or exchange of cryptocurrency into regular currency or another cryptocurrency
- when paying for goods or services in cryptocurrency
- while cryptographic mining
- computer data rental
- cryptocurrency received as wages
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
- giving cryptocurrency as a gift
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 “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.
A natural person had 1 Bitcoin, which they purchased for 2 500 euros in June 2017. Then, the natural person used 1 Bitcoin to buy a new car in December 2020. At the time of purchasing the car, the market price of 1 Bitcoin was 30 000 euros. Thus, the natural person had received the gain of 27 500 euros (30 000 - 2 500) from the purchase of the car.
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 treatment services, etc.).
A natural person received 0.05 Bitcoin as a remuneration for February from their employer. The employer declared the remuneration paid to the natural person in Appendix 1 of the company's February TSD. Upon declaration, the employer converted the remuneration paid to the natural person into euros on the basis of the Bitcoin market price valid on the date of payment. Upon declaration, the Tax and Customs Board withheld labour taxes from the salary paid to the person and the employer paid the taxes.
The natural person may use received and taxed 0.5 bitcoin to purchase various goods and services. The person has no obligation to declare goods and services received.
The use of income received in cryptocurrency and already taxed as a salary, remuneration of a member of the management board or dividends for the purchase of various goods or services no longer entails additional tax liability.
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 received remuneration or service fee in cryptocurrency from which income tax is not withheld, 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 the untaxed remuneration or service fee received from an Estonian employer in part II of table 5.1 and/or the untaxed remuneration or service fee received from a foreign employer in table 8.1 of the income tax return.
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. In the case of cryptocurrency transactions, is it necessary to declare only the income that was actually received in the bank account?
No, a natural person must declare all profitable transactions made in cryptocurrency, regardless of whether there were payments into the bank account from the platform.
2. If a sale of cryptocurrency resulted in the profit of 1-2 cents, must the transaction be declared in the income tax return?
Yes, all profitable transactions must be declared in the income tax return. A single transaction with a pair of benefits may not have an impact on the tax liability, but if there are many such transactions, then also the taxable amount will increase.
3. Declaring a large number of transactions is time-consuming. How to declare a large number of profitable transactions?
If the volume of profitable transactions is very large, it is allowed to declare the acquisition cost and sales price of the profitable transactions as a lump sum (e.g. also by type of asset). This presupposes that you also have a transaction-based calculation document in a readable form for submission to the Tax and Customs Board, based on which the declared amount was formed.
4. What should I do if I made profitable transactions with cryptocurrency in 2019, but then I was not aware of the obligation to declare them?
The income tax return can be submitted retrospectively and corrected within three years. To correct the tax return, please contact our customer support by phone 880 0811 or e-mail firstname.lastname@example.org.
5. A natural person buys cryptocurrency for 100 euros. Do I have to declare such acquisition in the income tax return?
The purchase of cryptocurrency for a regular currency is not considered a taxable transaction and you do not need to declare it in the income tax return.
1. A natural person lends cryptocurrency to a company and then, later, the company returns the borrowed cryptocurrency to the natural person. For example, I borrow 2 BTC (Bitcoin) and the company later returns 2 BTC to me. Does the individual (the lender) have 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 the individual, the individual does not have a tax liability.
2. If I lend 1 BTC to a friend and he returns me 1.06 BTC, what and where do I have to declare?
If a natural person lends 1 BTC to another natural person and receives back 0.06 BTC more, the interest received on the loan (0.06) must be declared in Table 5.6 of the income tax return.
Income from interest is declared in the income tax return corresponding to the year in which it is received. The natural person has to declare the interest gained in euros by calculating the value of 0.06 BTC into euros as at the time the interest is received.
3. A natural person has 1 Ether the acquisition cost of which is 2000 euros. The natural person lends 1 Ether to a company. At the time of granting the loan, the value of Ether is 3,500 euros.
a) Does the natural person have to declare a loan transaction and pay income tax on EUR 1,500, i.e. on the increase in value?
b) If the company repays a loan of EUR 3500 to the natural person in the future, does the natural person have to declare it?
a) As the granting of a loan is not considered a transfer of assets, the granting of a loan does not give rise to any income tax liability, whether or not the value of the cryptocurrency lent is higher than the purchase price at the time of the loan.
b) By a loan agreement, one person (the lender) undertakes to grant a sum of money or a fungible thing (the loan) to another person (the borrower), and the borrower undertakes to repay the same sum of money or return a thing with the same characteristics in the same amount and with the same quality. (§ 396 (1) of the Law of Obligations Act). Therefore, as a general rule, the same amount of money that was borrowed must be returned. In other words, if 1 Ether was borrowed, 1 Ether must also be returned, or if 1,000 euros was borrowed, 1,000 euros must be returned.
Thus, if a loan is returned to the natural person in the same type and amount of cryptocurrency, no transfer of property takes place and no income tax liability arises. However, if the loan is repaid in another cryptocurrency or in euros, it is considered a transfer of assets. If the amount returned to a natural person in euros exceeds the acquisition price of the cryptocurrency granted for the loan, it is a profitable transfer of cryptocurrency, i.e. the moment of taxation is the moment of repayment of the loan. The gains derived from the transfer must be declared in Table 6.3 or 8.3 of the income tax return of a natural person.
4. How are loans and loan refinancing on a platform of a decentralized lender (e.g. Compound and Aave) secured by cryptocurrency taxed?
The Income Tax Act does not provide for special provisions for the taxation of transactions on decentralized cryptographic platforms. The content of transactions performed on the decentralized cryptographic platform must be taken into account.
Borrowing is not a taxable transaction. If a natural person receives interest on borrowing cryptocurrency (in the same or other cryptocurrency), the interest is subject to income tax and must be declared. The same principle applies to refinancing.
5. Should the income from staking be declared and how?
The Tax and Customs Board treats the staking of cryptocurrency as the lending of cryptocurrency. If a natural person lends cryptocurrency for staking, it is not a taxable event. If a natural person receives income, i.e. essentially interest, from the lending of cryptocurrency as a result of staking, the interest received must be declared in Part II of Table 5.1 or Table 8.1 of the income tax return. Interest income is declared in the income tax return of a natural person corresponding to the year in which the interest was received.
1. A natural person buys cryptocurrency for 100 euros and sells it for 120 euros. In this case, has the natural person received a benefit of 20 euros and is it required to declare the benefit received?
Yes, as the acquisition cost of the transferred cryptocurrencies was 100 euros and the sale price was 120 euros, the profit of the transaction was 20 (120-100) euros, which must be declared in the income tax return.
2. If I invest/trade on an exchange platform, can I use the exchange platform’s exchange rate of the euro as a basis?
Yes. In the case of a transaction made under market conditions, the exchange rate of the environment where the transaction took place may be used as the market price.
3. Is the transaction fee an expense related to the transfer? Can a natural person deduct transaction fees from taxable profit?
Yes, if the transaction fee is directly related to the transfer of cryptocurrency, i.e. it is not possible to make the transfer transaction without paying the transaction fee, the documented cost may be deducted from the taxable profit. The costs related to the transfer are shown in column A “Acquisition cost and expenses related to the transfer” of Table 6.3 or 8.3 of the income tax return of a natural person.
4. If I use a robot that constantly makes transactions with small values of cryptocurrency, and it ends up with lots of transactions during one day. In this case, it is impossible to record profit of individual transactions. For example, I buy 2 and 2 units of cryptocurrency and sell 3 and 1 units of 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 a robot or broker only makes profitable transactions on your behalf, 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 presupposes that the taxpayer keeps records of his cryptocurrencies throughout the year.
Since 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 keep records of the acquisition cost of each individual cryptocurrency. Therefore, we accept the use of the FIFO or weighted average method to calculate the acquisition cost. In the case of the FIFO method, the transfer takes place in the order of purchase. In the weighted average method, the acquisition cost of one transferred cryptocurrency is calculated by dividing the acquisition cost of the assets of the same name existing at the time of the transfer by their number.
5. Is there any software to keep track of the transactions made on the platform?
You can choose the most suitable software to keep track of your transactions. It is only necessary to keep in mind that the calculation process is traceable and complies with the Estonian taxation rules.
6. If I processed the information received from the platform in Excel (removing unprofitable transactions), would this table be sufficient proof of purchase and sale prices?
In addition to your own accounts, the original documents on which the accounting is based must be kept, such as reports, orders, bank statements, etc.
7. I pay taxes in another country and receive salary income from another country. Does the benefit from cryptocurrency transactions have an impact on the calculation of tax-free income?
If a natural person is an Estonian tax resident, he or she is obliged to declare their worldwide income in Estonia, including benefits from cryptocurrency transactions. Gains from cryptocurrency transactions are included in the annual income, thus influencing the calculation of basic exemption.
Read more: "Calculation of basic exemption".
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. On what date did the taxation of cryptocurrencies become transaction-based?
The Tax and Customs Board has had one opinion on the issue of transaction-based taxation of cryptocurrencies. The guidelines on the taxation of cryptocurrency transactions have become more detailed over time.
3. How does taxation work when the cryptocurrency is exchanged directly for another cryptocurrency and the value of these cryptocurrencies is not denominated in euros?
Every asset has value. If the value is in another cryptocurrency, the price can be determined in euros. In a swap, the gain is calculated using the following formula:
gain = the selling price of the transferable cryptocurrency - the acquisition cost of the transferable cryptocurrency.
4. If I receive a salary in cryptocurrency, do I have to pay income tax if I exchange it to euros? Do I have to pay income tax if I keep the paid cryptocurrency and exchange it to euros after 2 years and, in the meantime, the value of cryptocurrency has increased?
A person does not have to declare if they transfer (exchanging into regular currency or purchasing goods and services) cryptocurrencies received as remuneration and taxed with labour taxes.
If a person invests cryptocurrency received as remuneration and taxed with labour taxes, profitable transfer is subject to income tax. Profitable transactions must be declared in Table 6.3 or 8.3 of the income tax return.
The Income Tax Act does not set a limit on when the deposit of cryptocurrency becomes an investment. Thus, taxation is based on the content of transactions. If a person receives 1 Bitcoin as remuneration, takes 0.5 Bitcoin into consumption and leaves the rest of Bitcoin in their cryptocurrency wallet, the Tax and Customs Board does not treat it as an investment. However, if a person invests 0.5 Bitcoin, then every subsequent profitable transaction is subject to income tax.
If a person receives remuneration in another type of virtual assets, the rules on the transfer of the property will apply to the subsequent sale / exchange of this virtual asset. This means that the recipient of the remuneration can take into account the value of the remuneration paid and taxed at company level as the acquisition cost and deduct it from the proceeds of the sale or exchange of that asset. Gains from the sale / exchange of assets are taxable.
5. How are NFTs (non-fungible tokens) taxed?
The taxation of NFTs depends on the content of the transaction from the perspective of the NFT creator and NFT purchaser.
If the creator of the NFT receives a resale fee, it is a royalty, which must be declared as a license fee in the income tax return.
If a natural person buys and sells NFTs for earning income, the income received is subject to taxation and every profitable NFT transfer must be declared in Table 6.3 or 8.3 of the income tax return.
6. If I as a natural person purchased cryptocurrency the value of which has increased compared to the purchase price and give it to the company, must I pay income tax? No, in the case of a gift, which results in the transfer of cryptocurrency from a natural person to a company free of charge, it is not considered a taxable transaction. Making a gift presupposes that the recipient of the gift (the company) receives the donated property free of charge, i.e. the person making the gift (the natural person) does not receive a benefit.
If a natural person decides to give cryptocurrency to the company as a gift, the property given to the company must be indicated in the gift contract. The donated cryptocurrency must be transferred from the account of the natural person to the account of the company and the company must record the transferred assets in the accounts at the value of the moment of transfer.
7. What happens if a natural person makes profitable transactions, but a little later the value of cryptocurrency falls by 90% and the person faces a huge loss due to which they are unable to pay income tax?
There is a risk involved in trading cryptocurrencies that needs to be considered. The increase and decrease in the value of cryptocurrencies are not taxed.
Every natural person has a prepayment account in the e-MTA environment, through which it is possible to transfer money to meet future tax obligations. We note that the final income tax liability arises upon submission of the income tax return. If there are difficulties in fulfilling the tax liability, it is possible to defer the tax liability. Read more: Payment of tax liabilities in instalments.
1. Is it necessary to create a separate new block chain address / wallet when making a non-monetary deposit of cryptocurrency to the company, or can you simply give the keys on paper to the company, so placing them under the company’s control?
We are of the opinion that when making a non-monetary contribution, cryptocurrency must be made available (reachable) to the company, including by transferring it to the company's wallet.
2. Is the company entitled to account for both profitable and unprofitable transactions?
The company can take into account all costs related to the company's business activities. The company's investment transactions are not separately declared or taxed. A company incurs a tax liability when it makes taxable payments, such as wages, fringe benefits, dividends or non - business payments, etc.
3. How should cryptocurrencies be entered in the company’s accounts?
Tax and Customs Board does not provide explanations and instructions regarding accounting. In order to organize accounting and financial reporting, you must follow the Accounting Act and the instructions of the Accounting Standards Board. On 10 September 2018, the Accounting Standards Board published an interpretation of the recognition of instruments based on block chain technology, which can be found on the website of the Ministry of Finance.
4. The company mines cryptocurrency, purchases equipment and provides capacity to natural persons and companies. Must the company have a license for this?
The issuance of activity licenses does not fall within the competence of the Tax and Customs Board. You can find more information about licenses on the website of the Financial Intelligence Unit.
Last updated: 01.06.2022