Crypto taxation in Estonia
On 24 November, Binace, in cooperation with Hedman law firm, organised a webinar on crypto taxation in Estonia.
Triin Ahveldt, tax consultant at Hedman Law Office, gave a presentation and answered questions.
Hedman advises digital and technology-driven companies, supporting clients at all stages of the company’s business cycle: from its development, to attracting investment, until the business is sold, including cross-border company mobility. We have experience in business, corporate law and IT law, data protection, taxation, financial technology, intellectual property matters and advising on digital business model processes.
Triin is a tax consultant at Hedman Law Office. She specializes in taxation, from planning the optimal tax structure for transactions until the successful completion of tax audits. Triin has also worked as an auditor and a lead auditor at the Estonian Tax and Customs Board (known as the MTA in Estonia), which means she is familiar with the nuances of the auditing process from a tax inspector’s perspective.
Triin studied taxation at the Academy of Internal Affairs for 3 years, worked for the MTA (Estonian tax authority) for 6 years as an auditor and lead auditor, conducting tax audits on companies, and then 5 years at a law office specializing in tax disputes, helping lawyers advise companies that had gotten into disputes with the MTA.
At Hedman, she specializes primarily in consulting, for both companies and individuals.
Also Triin has accounting knowledge, which allows her to give companies and individuals even more in-depth advice.
Please find Triin’s profile here.
Why are we talking about crypto taxation?
The topic of cryptocurrency and taxes is relatively new in terms of taxation in Estonia. The entire process has not played out yet, as rules are still being developed. I can talk about what we know today, though we need to keep an eye on the future developments. Major changes are usually announced in the media rather quickly because everyone knows that people are interested in crypto.
Why is a crypto license required in Estonia?
There has been a lot of anxiety on the matter of licenses, money laundering and problems with the Estonian financial supervision authority and especially among corporate transactions. There is a fear that all corporate crypto transactions are immediately going to be banned. This is not true. The problem with licenses concerns companies who manage third-party assets. If an individual decides to set up a business for a personal investment, then no license is needed and they won’t be prevented from doing so. There’s no cause for concern over it.
How should companies declare taxes on crypto?
In the case of companies, the distribution of profits is taxed. It means however the company makes a profit – whether by selling potatoes, providing a hairdressing service, trading crypto – as long as that money is not withdrawn from the company through dividends or any other profit distribution means, the transaction is not taxed.
Also when there are profits and losses, it is always possible for companies to take losses into account. As long as the company does not distribute dividends, no tax is levied. Tax returns are usually for income and social tax, which are filed by the 10th of each month. You fill out Annex 7 of the TSD form (income and social tax return) for profit distribution.
When can dividends be distributed?
The problem with using a company is that dividends cannot always be paid out. If a company is set up without initial contribution (the scheme where €2,500 is not paid into the company in the beginning) then in fact dividend payments can only be made once the €2,500 has been contributed.
Another restriction on dividends payments is that the company must have a profit according to the annual report, it must have been operating for 1 year.
There are some other options, but we will not go into them here. You can get in touch with our law firm if you would like to discuss this further.
How should private individuals declare taxes on crypto?
They file their tax returns once a year. The tax return for 2021 must be submitted no later than 31 March 2022. No other interim returns are required by tax law. As each and every transaction has to be reported, it’s worth thinking on how to do it.
One way is to obtain the data from an exchange. We know that Binance has an option to extract such data in a suitable format for the tax authority. Please use the link to get more information on how to extract the Binance report. But if there aren’t many transactions, you have to take note of the date of the transaction, the purchase price and the sale price in an Excel file. I’ll show you the tax return form with the information that has to be included after we are finished here. Everything should be reported in the year following the transaction.
What does it mean if someone has failed to declare their profits in the past?
If someone has not reported their profits previously, this can be amended and supplemented within a 3-year period.
How do I declare my income on Form A?
You need to fill out either 6.3 for Estonian income or 8.3 for foreign income. Estonian income is considered to be any profit earned on Estonian platforms, whereas foreign income is everything that has not been earned in Estonia. Elaborating a bit on Binance’s example on how this data is sent, apparently you have to send a support ticket and ask specifically what the country is.
When you report an Estonian asset, you need to know the country of the asset, its address (here you can put down the registered office of the exchange), the acquisition cost and the transfer costs, since box 6.3 of the form is for all kinds of assets.
For example, if you want to sell a car in while doing business, there can be costs associated with the transfer, such as notary fees. For crypto assets, there may be user charges or transaction fees. All this can be taken into account so it wouldn’t be included in the profit. Also the market price of the sale. The profit will be calculated by the MTA (Estonian tax authority) itself.
In the case of foreign income, you also need to provide the country - all other details will be the same: the type and cost of the acquired asset, the transfer costs, sale and market price. The MTA itself calculates the profit. If for whatever reason taxes have already been withheld in another country, proof of it can be obtained from the local tax office and taken into account.
What are the general rules about taxation of crypto assets?
Regarding the general taxation rules for private crypto assets, they fall under the usual definition of assets, the same as a car, house or property. As assets they actually cannot be equated with stocks/securities. The fact that crypto assets are not mentioned anywhere in tax law does not bother tax authorities. They are governed by the usual tax rules, as they are gains from sales and exchanges which are taxed.
The purchase price can always be taken into account. Only transactions which make a profit are reported, if they break even or come out at a loss, they are not reported. The tax rate is always 20%. Losses cannot be taken into account and crypto assets are not stocks. This means that an investment account cannot be used in the same way to defer any tax claims. Crypto assets do not fall into the legal definition of stocks/securities. It’s that simple, and that’s why it can’t be done right now.
Location is also important for tax purposes. Everything I am talking about here today is valid if the person is a tax resident in Estonia. And they have to pay taxes on an all their cryptoasset transactions in Estonia.
What does it mean to be a tax resident in Estonia?
The general rules for tax residency dictate that a person must either reside in Estonia or remain in Estonia for more than 183 days. Companies are considered to be tax residents if they have been established in Estonia. In principle, if it is an Estonian OÜ, AS or similar type of company, then it resides in Estonia.
In some countries, crypto assets are not taxed at all. It may be good to have your tax residence in such countries. In other countries, taxation may be higher. Not everything has been verified so, in principle, tax residency is still very important.
Where should I pay taxes, if I live in 2 countries?
If there is hesitation between two countries, for example, a person lives part of the time in Estonia and the other part of the time in Finland, you have to go to the double taxation agreement between Estonia and Finland, which determines the order in which the 183 days of residence is looked at.
Other countries have different rules. In Germany, citizenship is also taken into account.
There was also a question about changing residence in the middle of the tax period.
Technically, it’s possible. You have to file an application in the new country of residence, which will issue a certificate stating that it is now the country where the taxes will go. In such a case, you have to file two tax returns. Then you apply for half a year as a resident of one country and half a year as a resident of the other. The dates should be indicated in the tax returns accordingly.
How to determine the acquisition price?
We’ve talked quite a bit about the fact that purchase price can be taken into account in all kinds of cryptoasset transactions. Now we need to know how that purchase price is determined. According to Estonian law, these values must be converted into euros at the time of the transaction. If there is no euro exchange rate for certain crypto assets, either because of the exchange or because they simply use Bitcoin or the US dollar as reference, then another currency must be used. The US dollar exchange rate is usually available for all crypto assets, which can be converted into euros via the euro exchange rate. Historical euro exchange rates are available on the Eesti Pank (Bank of Estonia) website. For transactions made at a market price, rates published on the trading platform that is used. What we mean by market price transactions is that if a transaction is agreed with a completely different price to what the platform is currently offering, then it is not a market price transaction. Then you still have to look at the official exchange rate. Or the official exchange rate of that platform, not what was privately agreed.
In the event where someone buys some x-coin every month and at the end of the year they have 12 x-coins, but the first one was bought for €10 and the last one for €120, how do you calculate the acquisition cost?
There are two accepted methods: FIFO or weighted average. FIFO stands for ‘first-in, first-out’, which means the market price of the earliest x-coin purchased is taken into account. Weighted average is self-explanatory: it is the average of all the purchase prices. This becomes especially relevant for very large transactions. For example, if you have a computer program doing transactions for you.
To keep things moving, let’s go onto the examples now. So, I invented these coins myself, let’s call it Webinar-coin. Now, if I buy it for 20 euros today and sell it for 50 euros in January next year, I will have made a 30-euro profit. And since that profit was made in January of the following year, I will have to report it in the 2022 tax return, which is submitted in 2023. If this same coin is now exchanged for another coin with exactly the same value in euros within that year, then there will be no profit because the prices are the same. It’s a zero-profit transaction, nothing needs to be reported.
The previous examples are quite typical of someone putting euros into their account, buying crypto, selling that crypto later and then withdrawing euros again.
One more example: Let’s say that I buy 1 coin for 20 euros and exchange it for three other coins.
First, we must determine the market value of these new coins, in euros. If we take the value of one coin here as 10, then three are worth 30 and we have to report 30-20. 20 euros is the purchase price and you have to report the 10 euros profit in your tax return. If the value of this other cryptocurrency were lower, for example 5 euros, this exchange would be unprofitable for us because 3×5 = 15, which is the market price of these new coins. Before I had 20 euros worth, so the difference is -5 euros. This transaction does not need to be reported.
Now, let’s say there are a lot of transactions in sequence, so that you get some coins and later exchange them for something else and then you want to withdraw euros.
In my example, if you buy coins for 10 euros and later exchange them for other coins with a different value, the market price of this other currency being 32, as shown here, after I deduct the 10-euro purchase price from 32 I would get 22 euros profit and the tax would be 20%, or €4.40. If, a month later, I exchange these 40 z-coins at €0.70 each (€28), I will lose €4 on this transaction because the price has gone down in the meantime (28-32 = -4). It is important to look at all the transactions one by one. I report capital gains but don’t report losses.
How NFTs are taxed?
These are the same kind of assets as other crypto. The only difference is there is no need to use the FIFO or weighted average method because NFTs are distinguishable and you always know the price at which you bought and sold that particular asset. According to the MTA (Estonian tax authority), the tax exemption for movable property does not currently apply to NFTs, as the MTA considers that NFTs cannot be for personal use.
This position may be challenged, so the final decision will be reached in court. If someone wants to, they can try to take up this dispute. I would point out that even if the NFT were set up to be sold, it would not be covered by this exemption in any event. Only NFTs that a person has created for themselves would be included here. So I have this awesome NFT, I use it for a while and then you could start arguing whether it was for personal use or not. But this question is still unresolved. The MTA has expressed specific view that they will not accept it and this will certainly be challenged.
This example comes specifically from another of your questions: an NFT is bought for €2,000, sold for €40,000 and now the €38,000 gain is taxable, amounting to €7,600 in tax.
Now if we think that the money is taken out in euros at the time of this transaction, the transaction to exchange the NFT for 10 ETH is in fact taxable.
And now the 10 ETH are converted back into euros. When the value is exactly the same, the transaction does not have to be reported, because the difference between purchase price and market price is 0.
But if after some time the market price of 10 ETH is €20,000, the difference between the purchase price and the market price is negative and again is not reported. Now we have to consider the following transaction. The sale of NFT for €40,000 must be reported in any case, but for the next transaction where you convert 10 ETH into euros, there are three possibilities: if the market price is the same, you don’t report it; if the market price has fallen and you have a loss, you don’t report it; and if the market price of 10 ETH has increased in the meantime, you will have to report this gain on top of the initial €7,600 tax. Here in this example, it comes to €8,000 because the market price of 10 ETH has increased by €40,000.
Buying goods and services in cryptocurrency
Buying goods and services in cryptocurrency is the same kind of exchange transaction by which the cryptocurrency is exchanged for some kind of goods whose value can be calculated in euros.
This means you need to know the purchase price of the cryptocurrency and the market price of the acquired service or goods in euros.
Even if the price of the purchased goods or service is given in another currency, it should still be converted into euros at the time of the transaction. There may be an issue here if, for example, you have 1 x-coin that started with a very low value and set the price of a car at 1 x-coin, whose value has later risen.
Because the euro value of the new x-coin is higher at the time of the transaction, this is what is taxable. Usually when you exchange one currency for another, it is not taxable, but here you always have to convert everything into euros.
Taxation of Gifts and Airdrops.
An individual can always distribute his or her assets and make transactions at a loss. It means that if you have some kind of cryptocurrency, you can give it away for free because you don’t get anything in return, it’s a loss transaction, as you don’t make a profit. The emotional benefit of making someone happy is fortunately not taxed. The person who made the gift is not taxed for that amount. It may be a bit of a problem for the gift recipient, as the acquisition cost is 0. If they ever intend to do anything with this crypto later, the entire amount will be taxable. The logic is that since it was not taxed when that person received the gift, then the whole thing has to be taxed when the gift is sold.
What do companies need to keep in mind if they want to make gifts in crypto?
In the case of companies, we must bear in mind they should not distribute assets with no reason, as this incurs a tax liability. Businesses are bound to incur costs or such provision. Companies should have some sort of advertising target or similar. Under certain conditions, companies can also make gifts.
How and if is a loan taken out as a private individual against crypto assets taxed? The collateral is not transferable.
Regarding loans, having a loan repaid is not considered income. If I lend someone a car and get that same car back, I’m not making a profit. The same goes for cryptocurrency. If you borrow 10,000 x-coins and get back 10,000 x-coins, this amount will still be available to you. Interest and user fees are considered income. Say the amount of this cryptocurrency increases as a result of the loan. For example, through staking, which we don’t actually consider a loan. But since the user fee is similar, I’ve treated them here such that when the amount of the currency increases, it used to be 10,000 and now it’s 11,000, then this is taxable. The friend who got this loan, they received x-coin and have to give back the same amount of x-coin. Financially they have to pay a lot of money, but since it’s the same unit, the same x-coin, they don’t have to pay any tax because loan transactions are not taxable.
However, in this example, when returning the loan, the value of this x-coin is 2 times higher… There is a zero missing here, it should be 20,000 euros. This 10,000 difference will be taxed at the time of the next transaction. What it means is if I lend a friend 10,000 x-coins, the value of that x-coin keeps increasing, I get those 10,000 x-coins back from that friend, and its value continues to grow. Then, if I convert them into euros now, my purchase price is not the amount I got back from my friend, but the initial price, because it has not been taxed in the meantime.
What are the MTA's (Estonian tax authority) control measures?
And now let’s talk a bit about tax audits. The MTA (Estonian tax authority) inspects tax returns over 3 and 5 years. 3 years is the usual audit period, which goes from the submission of the tax return. The MTA has the right to audit for 5 years, if it substantiates that it is investigating some kind of intentional or deliberate violation.
The MTA does not automatically receive information on cryptocurrency transactions. This is similar to bank accounts, which are subject to the same rules.
So, if the MTA wants any information, it must ask that bank and, in fact, the person involved first. Otherwise, the bank may say: ask this person yourself. In the course of a tax audit, information can be requested from the person itself.
With private individuals, they have the right to refuse to disclose the information, as it can be detrimental to them. MTA can also request information from banks, especially if there are any transactions involving cryptocurrency and the FIAT currency.
Banks have this information, banks know where this money comes from. In principle, information can also be requested from trading environments, but the difference is that Estonian platforms and Estonian companies are fully within reach of the MTA.
Foreign platforms may not be, depending on how law-abiding the platform itself is. It is probably not worth the risk, but you must always take into account the possibility that if the MTA makes a request, it may also receive information from the platform. But in a tax audit, the person must be asked first, and the MTA also observes this principle.
If I work abroad and pay taxes in another country, what is the tax-free income amount?
Here we return to the question of tax residence. In principle, the tax exemption limit is established in the country of residence. If you are a tax resident in Estonia, you have a tax exemption up to a certain income amount in Estonia, which is calculated according to a corresponding formula. If you are a tax resident elsewhere, all taxes are calculated there, or at least taxes related to crypto should be calculated there. There may be some differences concerning social tax, but we won’t cover them here. In this case, you will also be subject to the tax exemption of the other country and all of its tax regulations.
Why do we have to pay tax for crypto transactions?
On this, we actually don’t question why we have to pay tax when we buy real estate and resell it sometime later. I’m not talking about the home tax exemption. It is a matter of social contract: if you make a profit, then you pay taxes. As for why we pay taxes on crypto, there are no exemptions yet, as these transactions are very new. We cannot rule out that at some point in the future the legislation may move towards making it possible for individuals to use an investment account in the same way as stocks/securities. This area is simply constantly evolving and no exemptions have been established yet.
How it is better to trade in crypto as an individual or as a company?
I would say since it is possible to take losses into account as a company, it is worth making all such investments under a company. I also mentioned the fact that withdrawing money from a company may not be the easiest. In situations where you earn a very large amount with crypto in one day, lose it all the next and end up at a loss overall – because there was profit in the meantime, you still have to pay tax on it. There is no such risk for companies.
How do you report transactions from previous years?
You would have to go back and amend previous tax returns, according to year. Say more than 3 years have passed since the transaction, 4 in fact, since these 3 years are calculated from when you had to file the tax return. And if there really was no malice on your part, you just accidentally didn’t do it, then the law establishes a limit of 3 years. You cannot and it’s not worth trying to amend earlier tax returns.
What is the most optimal way to transfer crypto assets acquired long ago to a newly-established company? The goal is to raise long-term investments under an OÜ (Estonian private limited company).
In principle, it would be a share capital contribution. Either the share capital can be increased or a share premium can be used for this. The general rule is that the management board, as provided by law, together with the auditor, overvalues this asset and records it in the company’s balance sheet. Also, making the 2.5 thousand euro contribution in crypto assets is not forbidden. However, the problem is that because it is so volatile, its value may decrease greatly at some point, so due care must be taken. But if the minimum requirements are met and you use a premium, then this is definitely an option. I still recommend seeking advice from a consultant in such matters.
Does the law treat crypto currency and other token assets differently?
It depends on whose position you look at. There is probably not much difference for an individual, at least not in terms of taxation. However, in the case of companies, some tokens are subject to income tax, but crypto currency largely is not. Some tokens also meet the definition of a security, which means that they are subject to the general regulations that apply to securities. For example, registration obligations and the like. Tax law does not make any direct distinction between them. Rather, it considers what the taxpayer (a natural or legal person) does with it. But yes, for a private individual it probably does not make a difference.
Would a loan taken as a private individual and secured by crypto assets, with non-transferable collateral, be taxable? If so, how?
Basically, if a crypto asset is used as collateral, then just like someone putting their apartment as collateral for their mortgage, it is not taxed. If any transfer takes place later, then yes, all these regulations will apply to this transaction. But as long as there is no change of ownership or asset exchange for another asset, no tax will be incurred on this transaction.
What happens if I, as an individual, lend crypto to a company? Can I get it back after a while without tax? For example, if I transfer 1 ETH from my private account to a company account, and after a year I get the loan back.
This transaction is not taxable because loans are not taxed. However, after this ETH has been transferred, you must bear in mind that any increase in value when the crypto was in someone else’s hands will not be taken into account and the original price will still be recorded as the purchase price. If there was any interest, for example, and the friend returns 0.1 in addition to this 1 ETH, then the 0.1 will be added as a new item, and it will have to be taxed.
If I take out a €10,000 bank loan and put it into Binance, I withdraw the money from Binance and repay the loan, will it also be taxed if the profits are still on the Binance platform?
The question now is whether anything was done on the Binance platform with these 10,000 euros. If it was simply placed on the Binance platform and later withdrawn, and it has only been in euros the entire time, then it will not be taxed. If in the meantime some kind of x-coin was bought for it, the sale of that x-coin will be taxed. With cash withdrawals, it’s not quite the case with companies that you put in 10,000 and get 10,000 tax-free. You still have to state quite precisely what transactions there have been in the meantime. If, in the meantime, you make a profit of 1 million euros, it is taxed when the 1-million-euro profit is made. The fact that you only withdraw 10,000 euros subsequently doesn’t mean that you pay no tax. This is one of the most typical questions, whether it’s only taxed when transferred to your regular bank account. But this isn’t the biggest problem at the time of taxation. The biggest problem is that the value of the cryptocurrency itself has increased, so its value is taxed when it is converted into euros. It’s very important to understand this difference: individuals have to look at everything on a transaction-by-transaction basis. You can’t just say: I’m going to put 10,000 in and take 10,000 out and the profit will still be there on the platform – it just doesn’t apply.
And here is our last question: what is the best way to withdraw crypto so that it is not taxable?
We would have to specify from where it is withdrawn. If you withdraw from a platform, then do it through a company, it’ll be much cheaper. Now, if you withdraw this crypto income from a company, it’s kind of harder, there are no legal ways to avoid taxation.
To the previous question, I suppose I would add where the money is and where the conversion to euros takes place. It also follows from this question how you withdraw the crypto. All this interconnectedness with banks means that the moment this money goes into a bank, it becomes much easier for the MTA to detect. By law, it would have to be taxed before. Basically, this is why people have the impression that it should be taxed when converted into Fiat, because Fiat currency is more traceable. This is not the case, in fact, as transactions on the platform that have never been withdrawn must also be taxed.