Cryptocurrency and taxes in Estonia

The topic of cryptocurrency and taxes in Estonia is relatively new for the tax field. Some rules regarding crypto taxation have already been established in Estonia, but the further development of the practice needs to be monitored.

Declaration and taxation of crypto transactions

The obligation to declare crypto transactions is completely different for individuals and companies. In the case of companies, separate transactions are not taxed. Only the distribution of profits, i.e. the payment of dividends, is taxed. The profit distribution is reflected in Annex 7 of the income and social tax declaration form TSD, which is submitted to the Tax and Customs Board by the 10th of each month. It should be kept in mind that it is not possible to pay out dividends if the company was founded without a share capital contribution or if the company does not have a profit confirmed by the annual report (has not been operating for at least 1 year).

Individuals submit an income declaration once a year, and all transactions are declared separately. On the income declaration of a natural person (FIDEK), Estonian income is reported in box 6.3 and foreign income in box 8.3.

When declaring within Estonia, it is necessary to know the type of property, the address ( exchange registration address), the acquisition cost and the costs related to the transfer, as box 6.3 of the declaration is intended for all kinds of property and the market price of the sale. For example, if a private person sells a car in the course of business, the costs related to the transfer can be, for example, state fees, costs related to technical inspection, etc., in the case of crypto-assets, the costs can be, for example, fees for the use of intermediary environments or transaction-based costs.

In the event that expenses arise at the notary or elsewhere, all this can also be taken into account and it will not be included in the profit. The tax and customs office calculates the profit itself. In the case of foreign countries, they also want to know the country, but all other information is the same, the type of property to be acquired, the cost of the property to be acquired and costs related to the transfer, sale and market price. The tax and customs office calculates the profit itself, and if for some reason taxes have already been withheld somewhere in the country, a certificate of this can be obtained from the tax office of that country and this already paid tax can be taken into account.

General rules for taxation of crypto assets for private individuals

Crypto assets are assets like a house, car or securities. Profits from the sale and exchange of crypto-assets are taxed at an income tax rate of 20%. Only those transactions from which profit is obtained are declared, if they remain at zero or at a loss, then the transactions are not declared. It should also be kept in mind that crypto-assets are not securities, which means that an investment account cannot be used to defer tax claims. Crypto assets are not subject to the definition of a security as defined by law.

Meaning of tax residency

A person is an Estonian tax resident if his residence is in Estonia or he stays in Estonia for more than 183 days. Companies are considered Estonian tax residents if they are established in Estonia. In some countries, cryptocurrency transactions are not taxed at all, in some countries they are taxed more severely than in Estonia. Therefore, when starting transactions with crypto-assets, you must definitely pay attention to your tax residency to understand which rules apply.

Estonia has concluded double taxation avoidance agreements with several countries. If a person divides his life between several countries, for example, lives part of the time in Estonia and part of the time in Finland, it is important to follow the content of the double taxation avoidance agreement in order to understand which tax exemptions apply.

It is also possible to change your country of residence. For this, an application must be submitted to the new country of residence, which will issue a certificate that it is the country where taxes are now being received. In such a case, two declarations must be submitted and the rules and laws valid for half a year as a resident of one country and half a year as a resident of another country must be applied.

Determining the purchase price

Since all kinds of crypto asset transactions can take into account the purchase price, it is important to know how the purchase price is determined. According to Estonian law, the values ​​must be calculated in euros at the moment of the transaction. In the event that some crypto-assets do not have a euro exchange rate, either due to the exchange or simply because bitcoin or US dollars are used for their reference data, this must be done through other currencies. Usually, all crypto-assets have a US dollar exchange rate, and the amounts can be converted to euros through the US dollar-euro exchange rate, historical euro exchange rates are available on the website of Eesti Pank . For transactions made at the market price, the rates published on the trading platform may be used.

If people agree with each other on some kind of transaction, which is at a completely different price than the platform offers, then it is not a transaction at the market price. In this case, you should look at the official rate or the official rate of that particular platform, not the rate that has been mutually agreed upon.

If there is such a situation that a person buys X coins every month and at the end of the year he has 12X coins, the first of which was purchased at a price of 10 euros and the last at a price of 120 euros, then the acquisition cost can be calculated in two ways. The first option is to use the FIFO method, which means first in first out , i.e. the market price of the earliest purchased X coin is taken into account in the acquisition cost. Another option is to use the weighted average method, in which the average of all purchased purchase prices is calculated. This becomes especially important for very large transactions, such as when a computer program is used to execute the transactions.

A few examples to illustrate the situation

If you buy 1 coin today for 20 euros and sell it for 50 euros in January of next year, then a profit of 30 euros has been made with this transaction, and since this profit was received in January of next year, it must be declared on the 2023 declaration, which will be submitted in 2024. If this same coin is exchanged for another coin whose value is exactly the same value in euros, no profit is made because their prices are equal. The transaction remains zero, and such a transaction does not need to be declared.

If you have bought 1 coin for 20 euros and exchange it for three other coins , you must first find out the market value of these new coins in euros. If the value of one coin is 10, then the price of three coins is 30, and the profit from the exchange must be declared, i.e. 30-20=10 euros. The purchase price is 20 euros and a profit of 10 euros must be declared. If the value of this other cryptocurrency was lower, for example 5 euros, this exchange would be unprofitable because 3*5=15 euros (the market price of new coins ), but the previous one was 20 and the difference would be -5 euros. This transaction does not need to be declared.

If you buy 20,000 X coins at a price of 0.0005 euros each and later exchange them for some other currency with a different value, for example 40 Z coins at a price of 0.8 euros each, then the acquisition cost would be 20,000* 0.0005 = 10 euros. The market price of Z coin would be 40*0.8=32 euros.

If its purchase price, i.e. 10 euros, is subtracted from 32, 22 euros of profit is obtained, which is taxed at a 20% income tax rate, i.e. 4.40 euros (22*20%).

If one month later these 40 Z coins are exchanged for euros at a price of 0.70 euros each, then a loss of 4 euros would result from this transaction because its price has fallen in the meantime (40*0.7=28). Here it is important to look at all transactions one by one. Those transactions that are in profit must be declared and those that are in loss are not declared.

Taxation of NFTs

NFT is the same asset as other crypto, the only difference is that there is no need to use FIFO or weighted average method, because NFTs are distinguishable and it is always known at what price a particular thing was bought and sold. According to the Tax and Customs Board’s point of view, the movable property tax exemption for NFTs does not currently apply, because the tax authority considers that it is not possible to use NFTs personally. This position may be disputed and the final decision will be made by the court. In any case, the movable property tax exemption could not be used if the NFT was created for the purpose of sale. The movable asset exception can be considered if a person creates an NFT for himself, uses it for a certain period and later sells it. At the moment, there have been no disputes, but the Tax and Customs Board has expressed a specific position that they do not accept such an approach, and in the case of this interpretation, litigation should definitely be considered.

Demonstrating the situation

I buy NFT monkey picture ( non-fungible token ) for 1 ETH (market price 2000 eur) . I am selling the same NFT for 10 ETH (market price 4000 EUR). An increase of €38,000 (40,000-2,000) must be taxed at a 20% tax rate, i.e. the tax amount is 7,600 euros. If you immediately transfer the sale price in euros to your account at the same time as the NFT sale, then you only have to pay taxes on the initial exchange transaction, because 10 ETH is exchanged into euros at the same rate and there is no profit when exchanging into euros. The price of receiving 10 ETH 40,000 euros and the price of exchanging into euros 40,000 euros are equal.

If the 10 ETH is not immediately exchanged into euros, but is expected, when the market price of 10 ETH is, for example, 20,000 euros (instead of the former 40,000 euros), then the difference between the purchase price and the market price is negative and is not declared. Here, the following transaction should be considered as a transaction, i.e. the exchange of 10 ETH for euros in the future. This transaction, which was the sale of NFT for 40,000, must be declared in any case, but the next transaction, where you exchange 10 ETH for Euros, there are three options: if this market price is the same, you do not declare, if the market price has fallen and you get a loss, then do not declare and if the market price of 10 ETH has increased in the meantime, you have to declare 7,600 euros from the first transaction and pay taxes on this increase as well. For example, if the market price of 10 ETH has increased to 80,000 euros, then 80,000-40,000= 40,000 euros and an additional 8,000 euros of income tax must be paid on top of that.

Purchase of goods and services in cryptocurrency

Buying goods and services in cryptocurrency is exactly the same exchange transaction, i.e. cryptocurrency is exchanged for some kind of goods, the value of which can be calculated in euros. For this, it is necessary to know the purchase price of the cryptocurrency and the market price of the purchased service or goods in euros. Even if the price of the purchased goods or services is given in some other currency, it should still be converted into euros at the current status of the transaction and the difference should be taxed. The problem may arise from the fact that if initially, for example, 1 X coin had a very low value and it is decided to set 1 X coin as the price of the car , the value of which has increased later, then if the euro value of the new X coin is higher at the time of the transaction, then its 1 X an increase in the price of a coin creates a taxable profit.

Giveaways and airdrop

A private person can always distribute his assets and make unprofitable transactions, i.e. he can give away cryptocurrency for free. This is considered a harmful trade because no profit has been made. For the gift giver, such a transaction is not taxable. For the recipient of the gift, it is a more problematic situation, because for him the acquisition cost is 0. If he plans to make transactions with this crypto sometime later, he has to tax the entire amount. The logic is that since it was not taxed at the moment when the person received the shoes, it must be taxed from the moment the shoes are sold.

In the case of companies, it must be kept in mind that companies are not allowed to distribute assets without reason, as this entails a tax liability. The gifted cryptocurrency can be related to business, if it is for the purpose of advertising, etc.

Loans related to crypto assets

Getting the loaned thing back is not income, so loan transactions are not taxable. Interest and usage fees are considered income. If you lend someone a car and get the same car back, you have not received income. The same goes for cryptocurrency. If you borrow 10,000 X coins and get 10,000 X coins back , those 10,000 X coins will still remain. If, as a result of the loan transaction, additional crypto coins are obtained , for example, before it was 10,000 and now it is 11,000, then this additional part is taxable.

For example, if you lend 10,000 X coins to a friend , the value of one x coin is 0.1 euros, so you lend 1,000 euros. You will get back 10,000 X coins in the same way , but at the time of return, the value of X coins is 0.2 euros, i.e. the value of the property to be returned is 20,000 euros. The friend who got this loan, he got X coin id and has to give back the same amount of X coin e, he has to give up 1000 euros more. Since the same amount of X coin e was issued as was received back and there is no exchange transaction, there is no taxation situation.

The increase in value is taxed at the moment when the next transaction is made with it. Therefore, if these X coins are exchanged for euros in the future, the acquisition cost is not the price at which they are returned from a friend, but the initial price at which these X coins were acquired, because in the meantime it has not been taxed.

Control measures

The Tax and Customs Board checks declarations within 3 and 5 years after submission of the declaration. 3 years from the submission of the declaration is the usual auditable period. 5 years after the submission of the declaration, the right to check is available if the tax authority justifies that there is some kind of intentional or conscious violation. The tax authority does not receive automatic information about cryptocurrency transactions. It is similar to bank accounts, because bank accounts have the same regulation, that if the tax and customs office wants information, it must first ask the person himself, and only after that can a concrete, justified request be made to the bank.

During the tax audit, the tax authority can request information from the taxpayer himself, but the private person has the right to refuse to share the information. In this case, the Tax and Customs Board can request information from the banks. You have to be careful especially if there have been some kind of transactions between cryptocurrency and FIAT currency, because the banks know where the money is coming from. In principle, the tax authority can request information from trading environments as well.

Estonian platforms and companies are accessible to the Tax and Customs Board, but foreign platforms may not be, it depends on how law-abiding the platform itself is. It is not worth taking the risk, because you always have to take into account the possibility that if the tax authority makes a request, he will also receive this information from the platform.