Cryptocurrency trading is becoming increasingly popular, prompting users to ask: do you need to pay taxes on cryptocurrencies, and if so, when? Generally speaking, there are three situations where tax obligations arise: when cryptocurrency is converted into fiat currency, when it is exchanged for another cryptocurrency, and when it is used to pay for goods and services.
When it comes to cryptocurrencies, only income-generating transactions are subject to taxation, and each case must be assessed individually. For example, if a person buys one bitcoin for €18,000 and sells it for €10,000, they do not need to declare the transaction because there was no income. Conversely, if someone buys one bitcoin for €10,000 and sells it for €18,000, the €8,000 gain must be declared and taxed at 20%.
Thus, the income earned is the difference between the purchase price and the sale price of the cryptocurrency. The purchase or sale price or income must be converted to euros based on the exchange rate on the date the income was received or the expense was incurred. If the transaction was made under market conditions, the prevailing exchange rate can be used. If the transaction does not involve euros, the income must be converted accordingly.
When exchanging one cryptocurrency for another, the market value and income (i.e., profit) must also be calculated. For example, a person buys two litecoins for €260, and a few months later exchanges them for 0.2 ether. At the time of exchange, the market price of the two litecoins had increased to €500. Thus, the person earns €240 (€500 – €260) in profit, which must be declared and is subject to income tax.
When paying for goods or services with cryptocurrency, the income is the difference between the purchase price of the goods or services and the acquisition cost of the cryptocurrency used. For instance, a person owns one bitcoin bought in June 2017 for €2,500. In December 2020, they use it to buy a car when the market price of bitcoin is €30,000. Thus, the person earns €27,500 (€30,000 – €2,500) and must declare this income and pay tax on it. This calculation applies to the purchase of any goods or services (e.g., food, electronics, beauty treatments, etc.).
It is important to note that converting income already taxed (e.g., salary, dividends, director’s fees) into fiat currency or using such income to buy goods or services does not incur additional tax obligations. For example, if a person receives a February salary of 0.05 bitcoin from OÜ X, which has been declared and taxed by the company based on the market rate, the person does not have to declare it again in their crypto wallet. If the person uses that 0.05 bitcoin to buy goods or services, it does not need to be declared again.
If an individual develops cryptocurrency, the income must be declared as business income. Cryptocurrency development is considered entrepreneurship and is treated as the production of goods for tax purposes. Tax liability arises from any gain made through the disposal of cryptocurrency via sale or exchange. A person who regularly develops virtual currency must register in the Commercial Register and operate either as a sole proprietor (FIE) or through a legal entity. A registered FIE may deduct and declare business expenses incurred (e.g., equipment, electricity, etc.).
A private individual cannot deduct expenses when earning income from cryptocurrency development. FIEs must also keep in mind that cryptocurrencies cannot be transferred to a special deferred tax account. Investments in cryptocurrency can also be made through business associations, which are subject to separate tax rules.
Functions of the Estonian Tax and Customs Board (ETCB)
The goal of the Estonian Tax and Customs Board (ETCB) is to maintain transparency in the cryptocurrency community and identify individuals and companies conducting fraudulent activities. Since most crypto transactions are cross-border, international cooperation is key in sharing information about crypto-related risks.
Today, we can say that information exchange with foreign countries is effective, and nations understand that successful cooperation helps identify those who have moved their operations abroad and do not follow exemplary tax practices.
At the same time, the ETCB continues to improve its practices in handling cryptocurrency tax matters. The number of consultations and investigations into tax evasion related to various cryptocurrencies is increasing monthly. In addition to our own experience in crypto development, there are legal precedents—such as a case where a trading company benefited from an unjustified VAT deduction. We have also examined a case involving information received from a foreign crypto exchange and a person’s account with a foreign credit institution. We continue to advise and investigate individuals and business associations, and the number of cases is steadily growing.
Consequences of Tax Evasion
What happens if you don’t pay taxes? The ETCB can retrospectively assess tax liability for up to three years, and up to five years in cases of deliberate tax evasion. In addition, interest is charged on unpaid taxes.
It is also a criminal offense to provide false information in a tax declaration. A private individual can be fined up to €1,200, while a legal entity can be fined up to €32,000. Providing false information to reduce tax liability, thereby concealing a tax obligation of €40,000 or more, is a criminal offense punishable by a fine or imprisonment for up to five years. Concealing a tax liability exceeding €400,000 can result in imprisonment of one to seven years.
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