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 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.
Wages/dividend 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.
Dividends can be paid in virtual currency as well as other types of virtual assets.
If a dividend is paid in virtual currency, 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.
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.
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.
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 virtual 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.