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Taxes and Cryptocurrency in Latvia

2021-11-08

On November 3rd, Binance and Sorainen organized a webinar about the application of taxes to cryptocurrencies in Latvia. It is available in the Binance account on YouTube or Facebook

We have received countless questions from our community and therefore couldn’t provide answers to each and every one of them. We chose the most common questions, and Sorainen tax experts provided answers during the webinar. In this article, you will find frequently asked questions and their answers. We hope that you will find this information useful.

Binance would like to thank Aina Oksenuka and Aija Lasmane for their time and for sharing their expertise.

You can always contact Sorainen if you need tax or legal advice.

Important Information

This presentation should not be considered tax and/or financial advice. We have not evaluated the conditions of your particular case.

Legal acts and their interpretation can change rather quickly. There may also be situations when legal acts are equivocal and/or their impact and consequences are unclear.

To explore procedures for the application of taxes in your specific situation, please contact a tax advisor.

What amounts do you pay taxes on? Is it the sales amount or your profit?

Capital gains – income (profit) from the sales of crypto. Subject to 20% personal income tax. Social contributions are not applied.

Sales of virtual currencies (appropriation) is an exchange transaction resulting in obtaining an official currency, asset (payment in kind) or other services (explanation provided by the SRS).

How are capital gains calculated?

Price for the appropriation of a capital active - initial purchase value

The sales/purchase price of a virtual currency is considered payment in kind or a fiat payment.

If it is impossible to determine the initial purchase value of a capital active, its purchase value is considered 0.

Calculation of purchase value: FIFO or weighted average price method can be used. This method has been used for at least 10 years. Expenses related to the acquisition of cryptocurrency (fees, state duties) can be included in the purchase value.

Example:

A purchased Bitcoin for USD 1260 (converted from USD to EUR at the established conversion rate at the moment of purchase - EUR 828.95) on 15 December 2015;

A sold for EUR 1260 on 2 May 20XX.

→The taxable income is EUR 431.05  (1260 – 828.95).

Are there any special cases?

- Gift. If virtual currency has been obtained based on a gift agreement, its purchase value is considered to be equal to the respective value of the specific virtual currency stated in the gift agreement, and it doesn’t exceed the appropriation price of the virtual currency.

- Inheritance. If virtual currency has been obtained as a result of inheritance, its purchase value is equal to the value of the specific virtual currency included in the estate.

On what day is the income considered obtained?

The day of the income is the day when the payer receives money or other assets.

How is the tax calculated if one virtual currency is exchanged with another currency and the value of both currencies has increased?

If, as a result of an exchange of virtual currencies, one virtual currency is exchanged with another and the value of both the currencies has increased since the purchase of the first virtual currency, the tax payment obligation is postponed until the virtual currency which was obtained as a result of the exchange is converted into Euro or other currency.

Example: in January 20XX Atis exchanged Bitcoin, that had been previously purchased for EUR 850, with Ethereum, hence obtaining an increase in value, but in September 20XX he sold it for EUR 1,000 and at the end of the same month purchased Bitcoin again for EUR 1,000. The taxable income is EUR 150 (1000 – 850). Atis has to submit his declaration on capital gains income by January 15 of the following year.

What is the time-frame for completing the declaration?

Quarterly declarations. By the 15th date of the month following the quarter, provided the total income from transactions with capital assets in the quarter exceeds EUR 1,000 (April 15, July 15, October 15, January 15).

Annual declaration of capital gains. By January 15 of the year following the taxation year, provided the total income from transactions with capital assets in the quarter doesn’t exceed EUR 1,000.

The calculated tax amount is to be paid by the 23rd date of the month in which the declaration of capital gains income is to be submitted.

What happens in the case of losses?

Losses can be covered by positive capital gains from the appropriation of cryptocurrencies (adjusted declaration of annual capital gains income is submitted starting from March 1 of the post-taxation year).

Example:

On 5 January 20XX Brigita sold Cardano for EUR 1,500, which had been purchased for EUR 1,550.→Losses of EUR 50 occured.

In March of the same year she purchased Bitcoin for EUR 800 and sold it in September for EUR 1,810. By October 15 of the same year Brigita submits her declaration of capital gains income declaring EUR 1,010 (1810-800) and pays EUR 202 in tax (20% of 1,010) by October 23.

As of March 1 of the following year, she submits an adjusted declaration of annual capital gains income in order to recover the overpaid tax for losses in the January transaction.

I do crypto mining. How is the tax calculated?

Income from business activities – if virtual currency is sold in the course of the business – is generated and received as remuneration.

The income is subject to personal income tax (20%/23%/31%) and social contributions for the self-employed.

Expenses related to an economic activity might be considered banking fees, internet domain fees, as well as registration, software maintenance, internet and advertising expenses.

Expense limitation – 80% of annual revenue, excluding labour costs, real estate tax and depreciation of fixed assets. (In 2020 and 2021, the limitation of 80% is not valid)

An alternative – micro-enterprise tax. 25% for annual revenue up to EUR 25,000 and 40% for the amount of revenue that surpasses EUR 25,000 in the respective year.

Should crypto transactions be reflected in a company’s accounting records?

Cryptocurrency transactions are to be reflected in a company’s accounting records just like any other transaction that changes the property status of the company.

In accounting, cryptocurrency is not considered a financial instrument or a financial asset, however, it needs to be recorded as stock in current assets. It is comparable to goods that can be used as a means of exchange upon the decision of parties.

Is corporate income tax applied to crypto transactions?

As set out in the Law on corporate income tax, 20% corporate income tax is paid at the moment of distributing profit.

The Law on corporate income tax does not stipulate any special rules pertaining to the application of the tax to crypto transactions.

For the purpose of the application of the corporate income tax, cryptocurrency is in fact comparable to any goods.

Are crypto transactions subject to VAT?

VAT is not applied to purchase and sales transactions (Decision of the Court of Justice of the European Union of 22 October 2015 on the case C-264/14, pertaining to proceedings of Skatteverket against David Hedqvist).

Cryptocurrency trading itself does not create the obligation to enroll in the SRS register of VAT payers.

Cryptocurrency exchange fee is subject to 21% VAT.

Are any regular reports to be submitted to the SRS regarding crypto holdings and changes, or does it only apply to situations when crypto is sold for fiat from which personal income tax is then calculated? When exactly is the tax paid? Is it when EUR arrives in a Latvian bank account? Is there something that needs to be done if I hold EUR in my Binance account? 

The tax is applied at the moment of acquisition of income. The moment of acquisition of income is when crypto is sold and you receive EUR or goods/services in return, regardless of the account where the money is held. While you’re only holding crypto and do not sell it, no income is generated and no reports need to be submitted.

Do I have to pay taxes if losses have surpassed profit obtained through buying and selling crypto?

If there are only losses in the quarter, no declaration is submitted and no tax is paid. 

1 - If an exchange offers the option to trade crypto for fiat, e.g., BTC/USD. When is profit calculated? Is it immediately after each trade? Or is it at the moment of withdrawal to your bank account?

2 - Is staking treated as crypto mining?

1. Profit is calculated each time one sells crypto and receives money in return (EUR, USD, etc.).2. If you receive crypto as a result of providing a service, the taxation order of business activities is applied.

Can a money transfer to Coinbase or another exchange be classified as a point of reference for a purchase, and withdrawal to a bank account be classified as a point of reference for a sale?

The tax is applied when income has been generated. The moment of acquisition of income is when crypto is sold and EUR or goods/services is received in return.

Do you have to pay tax on crypto donations?

If you donate your cryptocurrency, the price of appropriation in this case is 0 and no capital gains are generated.

What tax are you referring to? There is already a 20% tax.

Yes, we are referring to 20% personal income tax for capital gains. There can also be taxes that are applied to performers of economic activities.

Investments in crypto were made in 2017, 2018, 2019 and the same amount as invested was only withdrawn in EUR in 2021. Is such a transaction subject to the tax on capital gains, and how should it be declared to the SRS?

If no capital gains (profit) is generated, no tax is paid.

Do I have to calculate profit and pay the tax if the asset is held in a cryptocurrency account, or do I have to calculate only the part that is held in fiat in relation to investments?

The tax is applied only when income is generated. The moment of acquisition of income is when crypto is sold and EUR or goods/services is received in return. No income is generated while you hold crypto and do not sell it.

Do I have to pay taxes on each crypto transaction on the Binance exchange, or does it only apply to the moment when I withdraw money to my bank account?

The tax is applied at the moment of acquisition of income. The moment of acquisition of income is when crypto is sold and EUR or goods/services is received in return, regardless of the account where the money is held.

My question is quite complex but I will give it a try with an example.

1. I’ve made a deposit of € 1,000 to the Binance exchange from my bank account.

2. I buy cryptocurrencies.

3. After 3 months I’ve decided to sell everything for € 2,000.

4. I try to withdraw the whole amount to my bank account but I’m not allowed to because Binance does not accept SEPA transfers and Mastercard any more.

5. I transfer € 2,000 from Binance to another cryptocurrency exchange and withdraw money from it.

Is the whole amount of € 2,000 subject to tax, or is it only applied to capital gains - 1,000?  

The bank statement shows that  € 1,000 was transferred to Binance, but the amount received came from another exchange.

In order to deduct the purchase value, you need to have documents confirming the transactions - printouts, payment orders, etc. If the value of the purchase can be proved, you have the right to deduct it.

For example, my total losses in exchanges comprised EUR 10,000. I managed to earn EUR 1,000 once. Does it mean that I have to pay the tax on EUR 1,000?

And how can the State know about my transactions on Binance? Can Binance keep my business secret?

Losses can be used to cover profit gained from selling crypto in the respective year ( adjusted declaration of capital gains income) within one taxation year.

How are taxes calculated if a person has not purchased crypto but has obtained it as a result of mining?

The SRS explains that taxes on crypto mining are paid in line with the taxation order of business activities.

What tax rate is planned for cryptocurrencies in Latvia? When is the tax applied? (When buying/selling on an exchange, or only when the crypto is sold for common currency like EUR, USD, RUB?) When is it planned to implement these taxes? What payment system will be in place? (Will the tax be paid to the SRS or via intermediaries?) The tax is applied at the moment of acquisition of income. The moment of acquisition of income is when crypto is sold and EUR or goods/services is received in return. The tax rate is 20% of capital gains. Each taxpayer is responsible for the settlement of tax payments, and there is administrative and criminal liability for the failure to comply with tax legislation.

If I invest EUR 1,000 in crypto,with EUR 100 left I want to regain it. Do I have to pay tax on those EUR 100? 

No taxes are applied if losses occur.

Are the following activities considered withdrawal of profit or transfer of assets? Transfer of cryptocurrencies to a third party’s wallet. Transfer of a cryptocurrency to another Binance account. Transfer of a cryptocurrency to one’s own account on another exchange. Purchases using cryptocurrencies.

Of the examples provided, only the latter is considered the moment of acquisition of income.

 If profit is gained from selling crypto, 20% personal income tax is applied. Therefore, I made a small investment in 2019 (value of EUR 200), I decided to sell it in 2021 when the value was  EUR 2,000. What are the next steps to be taken to see this money in my bank account? 

The following sentence in the SRS homepage is also unclear.

'Documents supporting transactions (bills of sale/purchase) do not need to be added to declaration DK but they need to be maintained for at least five years so that they could be presented to the State Revenue Service upon request.'

From this sentence, I understand that if I buy and sell cryptos I need to present bills to SRS officers upon their request. For example, when buying crypto on the Binance exchange I didn’t receive any bills or any other documents (except for emails that I receive when buying or selling a specific cryptocurrency) but is it sufficient evidence for the SRS? If not, what is? Cryptocurrency exchanges also offer the option to view all buy/sell transactions for the last 3 months, but what happens when the transactions took place earlier and cannot be accessed any more?

Any printouts, screenshots, and payment confirmations should be stored separately to be able to prove transaction volumes and prices in the future. 

To what amounts are taxes applied? To sales amounts or profit? How is it monitored?

Capital gains income (profit, if purchase documents are available) is subject to 20% personal income tax. Each taxpayer is responsible for the settlement of tax payments, and there is administrative and criminal liability for the failure to comply with tax legislation.

Is social tax included in the 20% tax? Does it affect pensions? 

No, it isn’t included. It doesn’t affect pensions.

What happens if a cryptocurrency is exchanged for another cryptocurrency and then the new cryptocurrency is sold for an official currency? How is tax calculated in this case?

The SRS explains that the tax is to be paid at the moment of exchanging a crypto for an official currency. 

Is profit calculated at the moment of a transaction on Binance or when EUR returns to your bank account?

It is not crucial whether money is in Binance or any other bank account. Taxes are calculated even when income is acquired in accounts on Binance or similar platforms.

Any supporting documents that you can obtain - printouts, payment orders, etc.

Do you have to pay taxes on transactions made on Binance?

Yes, if income is acquired.

If I purchased Bitcoin in 2017 on X platform and ETH in 2019 on Y platform but in 2021 I exchanged BNB for EUR on Z platform. Do I have to show all the transformation history?

In order to deduct the purchase value, you need to provide its justification. If it is not possible to justify the purchase value, it will be considered 0.

I invest € 500. The value of the currency increases and reaches € 600. I withdraw € 500 and leave the difference (€ 100) in cryptocurrency X. I do not seem to realize the gains. Do I have to pay any taxes in this case?

If you sell a part of the cryptocurrency for an official currency, the purchase value should be calculated proportionally to the sold part. Hence the purchase value won’t be EUR 500 and there will be capital gains.

What happens if Bitcoin is used as a pledge to receive a credit. Is this transaction subject to tax? Theoretically it shouldn’t be, because it is the same as with a pledge on immovable property, right?

It can be taxable if the loan is paid back in an official currency.

So, if profit in a quarter doesn’t exceed EUR 1,000, do I report it in my annual declaration? What if it doesn’t reach the threshold in the first quarter but does reach it in the second? Then do Ireport the 2nd and the 3rd Qs in my annual declaration, and by which date do I declare the 1st and the 4th Q?

Yes, you evaluate quarterly if the limit of EUR 1,000 has been reached.

At work, the employer pays for me, but, if I increase the threshold due to crypto (from 20k (23%) to 50k (31%), will I have to pay an additional 8% from NET salary that I receive for my official job?

Salary income is subject to payroll taxes (progressive rates of personal income tax are applied). Capital gains income from cryptocurrency trading is subject to a 20% tax rate, paid separately.