Earning income with virtual currency/cryptocurrency (e.g. bitcoin etc.) through various websites has become a new way of generating income. Below, we will explain how a private person has to declare income derived from virtual currency.
Income can be generated in different ways, for example:
price changes of virtual currency when buying and selling/exchanging virtual currency
mining of virtual currency
renting out storage capacity
receiving wages in virtual currency
Income received in virtual currency (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 virtual currency (market price) applying on the date of receipt of the income or costs.
Central rates of virtual currency 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 virtual currency 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”.
Purchase, sale or exchange of virtual currency
Within the meaning of subsection 15 (1) of the Income Tax Act, virtual currency is considered as property.
If a private person receives income from trade, purchase and sale of virtual currency or from the exchange of virtual currency against another virtual 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 virtual currency.
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 for in § 39 of the Income Tax Act. Virtual currency is not considered as a security and loss suffered upon the exchange of virtual currency cannot be taken into account for taxation purposes. Therefore, it is not possible to declare such a transaction. Consequently, the costs of economic risks in the case of decrease in the value of virtual currency will be borne by the person concerned. The Financial Supervision Authority published a warning in this regard for virtual currency users on its webpage "Virtuaalraha pakkujad ei kuulu järelevalve alla"("Virtual currency providers are not subject to supervision") on 5 February 2014.
If a private person is independently engaged in virtual currency 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 person who permanently mines cryptocurrency has to register as a sole proprietor 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.
Renting out storage capacity
Income derived from renting out the storage capacity of a private person’s computer must be declared in table 7.3. of the income tax return as rental income. 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.
Wages received in virtual currency
Employers registered in Estonia have to convert wages paid in virtual currency into euros at the current market price, and withhold and pay labour taxes on the payments made to employees.
If a private person receives remuneration or service fee in virtual currency 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 virtual currency, the virtual currency can be used for purchasing various goods or services without any additional tax liabilities.
Value added tax
Like exchange transactions with traditional currencies, the exchange of virtual currency against traditional currency and vice versa is exempt from VAT. Therefore, dealing with virtual currency, including mining, is not subject to VAT and there is no obligation to register for VAT purposes. Regardless of whether payment is done in virtual currency or in any other currency, general VAT rules apply on goods or services.