The obligation to pay income tax may arise in the case of a person/natural person exchanging a cryptocurrency for an ordinary currency or for some other cryptocurrency, as well as in the case of the use of a cryptocurrency to pay for goods and services, if the person earns an income, informs the Estonian Tax and Customs Department in anticipation of the tax declaration period.
It is important to bear in mind, however, that in the case of cryptocurrency, each transaction should be valued separately, since only transactions that generate income are taxed, i.e. profits. The loss incurred in the exchange or sale of cryptocurrency is not included in the tax, so that the loss-making transactions are not declared and do not affect the taxable income of the individual.
Profit on the sale or exchange of a cryptocurrency is defined as the difference between the value of the sale of the cryptocurrency and the value of its acquisition. For example, if a person buys one Bitcoin at a price of 18,000 Euros and sells it at a price of 10,000 Euros, they should not declare the transaction because the transaction is unprofitable (10,000-18,000). When a person buys one Bitcoin for 10,000 Euros and sells it for 18,000 Euros, he earns 8,000 Euros (18,000-10,000). This means that a profit transaction should be declared in the income declaration in Table 6.3 or 8.3 as income derived from the disposition of other property, and income tax at the rate of 20 per cent should be paid on that income.
The cost of acquisition and the price of sale of the cryptocurrency must be converted to euros, taking into account the exchange rate of the cryptocurrency in effect on the date of receipt of income or expenditure. If the transaction was made on market terms, the exchange rate of the medium in which the sale took place may be used.
When exchanging one cryptocurrency for another, it is necessary to control the market price of the transaction and to determine the income received. For example, a person acquires two litecoins worth 260 euros, which a few months later exchange for 0.2 ethers. At the time of the exchange transaction, the market price of the two litecoins rose to 500 euros. As a result of the transaction to exchange the cryptocurrency of a person, a profit of 240 euros (500-260 euros) was made, which has to be declared and with which to pay income tax.
When paying the cryptocurrency for a good or service, the income received is calculated as the difference between the price of purchasing the good or service and the cost of acquiring the cryptocurrency used. For example, in June 2017, people purchased Bitcoin for 2,500 euros. In December 2020, the market price of Bitcoin was already 30,000 euros, and a man used this Bitcoin to buy a new car. Thus, the income from the car purchase transaction was 27,500 euros (30,000-2,500). The income generated should be declared and paid as income tax. The same method of determining taxable income applies to the purchase of other goods and services (for example, food, machinery, beauty services, etc.).
It is important to note that if the income derived from the cryptocurrency and previously taxed by income (e.g., wages, dividends, and the salary of a member of the board) is exchanged for an ordinary currency, and is also used for the purchase of various goods and services, This no longer entails an additional duty to pay taxes. For example, the Estonian employer paid the employee a salary of 0.05 bitcoin for February, the employer declared the salary on the basis of the market price of bitcoin and paid labor taxes. If the salary received by the electronic wallet of 0.05 bitcoin is used to pay for various goods and services, then there will be no obligation to declare income. But if a person decides to invest in the cryptocurrency, each subsequent profitable transaction with the cryptocurrency will entail an obligation to declare and pay income tax.
If a natural person engages in the mining (mining) of cryptocurrencies, the resulting income must be declared as business income. In taxation, a cryptocurrency is equivalent to the production of a commodity. The duty to pay taxes arises from the profits earned at the time of the disposition of the cryptocurrency, i.e. at the time of its sale or exchange. A person who engages in the routinely mainstreamed cryptocurrency must register with the Business Register and act either as an individual entrepreneur (MNP) or through a business association. A registered entrepreneur may deduct from business income expenses incurred to generate business income (e.g., equipment, electricity, etc.). A person who is not registered in the Business Register as an entrepreneur cannot deduct the expenses incurred to earn income from the Cryptocurrency mining.
Cryptocurrency is also used to generate income from steaking (bet). By investing cryptocurrency in a chain of blocks in a blockchain, they essentially block their assets and pay a price for it. The Tax and Customs Department (NTD) views this process as the borrowing of a cryptocurrency. If a person earns income from a steak, that income is actually interest on borrowing a cryptocurrency. It is up to the person to declare the interest earned in the income statement (in part II of table 5.1 in part II or in table 8.1). The interest earned is declared in the income statement, which corresponds to the year in which interest is received.
It is important to note such cryptactin as NFT ( in translation from English language «non-reciprocal token», which is often associated with digital art. The NFT should be taxed on the basis of the content of the transaction from the perspective of both the originator and the buyer. If a person buys and sells NFT for the purpose of generating income, the profits derived from the NFT disposition are subject to declaration as disposition. If the creator of NFT is a natural person, each time receives a fee from the resale, this fee is a royalty. Royalties must be declared as royalties in the income declaration.
Since most transactions with cryptocurrency are cross-border, it is international cooperation that is an essential part of risk information exchange, explained NTBs. To date, STD considers the exchange of information with foreign countries to be effective. States are aware that successful cooperation contributes to the better and early identification of those who have taken their activities abroad and whose tax behavior does not conform to the norm.
The practice of NTD in cryptocurrency tax cases is increasing, with NTD handling an increasing number of cryptocurrency tax cases. Moreover, in addition to NTD’s own practice, there is also jurisprudence on the mine of cryptocurrency, where the commercial association has obtained a tax advantage in the form of an unjustified deduction of the entry tax on turnover. NTD has also dealt with cases in which data obtained from foreign cryptocurrency exchange platforms, as well as data from settlement accounts opened in credit institutions of foreign countries, have been the subject of verification.
The NTD can retroactively impose a tax payable for up to three years and, in case of willful non-payment, up to five years. In addition to the amount of taxes not paid on time, the rate of interest is 0.06 per cent per day.
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