May is almost at an end, and what a spring it has been!
This year we decided to launch an 8-part article series about different blockchain and crypto phenomenons, and what their legal implications are or might be. From the metaverse to filing your taxes, we aim to shed light on some of the most basic as well as the most novel topics revolving around and evolving in the blockchain and crypto sphere.
This article series will cover one phenomenon each month and, as it is tax season, first we delve into the taxation of cryptocurrencies in Finland. During the rest of the year we will cover hot topics, such as NFT:s, De-Fi and Web3 (don’t worry, we’ll surprise you with the rest).
Cryptocurrency as a Taxable Income
At the moment, the taxation of cryptocurrencies in Finland is not specifically mandated by law, but rather by guidelines from the Tax Administration and rulings of the Supreme Administrative Court of Finland which equate income from cryptocurrency as income defined in the Act on Income Tax.
Currently, tax liability for crypto-related transactions can trigger in several ways. Retail investors and companies utilizing cryptocurrencies (including so-called NFTs) should keep in mind that their obligation to pay taxes can trigger, for example, in these situations:
- Selling cryptocurrency in exchange for fiat currency;
- Swapping one cryptocurrency to another (including, for example trading an NFT for another cryptocurrency such as Ethereum or Solana);
- Buying goods with cryptocurrency (for example by utilizing a cryptocurrency-based payment card, such as a Binance Card);
- Gaining possession of mining rewards from participating in a “proof-of-stake” or “proof-of-work” mining protocol;
- Providing liquidity with cryptocurrencies;
- Lending activities with cryptocurrencies;
- Margin and futures trading with cryptocurrencies; and
- Receiving airdrops.
For tax purposes, every instance of spending, using, realizing, selling or trading cryptocurrency that triggers tax liability is treated as a separate transaction. For example, in the case of gains from proof-of-stake mining, every time a miner receives a reward for staking their cryptocurrency, each reward gained is deemed as a separate, taxable transaction.
It is worthwhile to mention, however, that although every transaction generally triggers tax liability, transferring a cryptocurrency between a single owner’s wallets of the same cryptocurrency does not trigger tax liability.
Profits and Losses
For the average crypto taxpayer, the most common taxable income comes from selling your cryptocurrency in exchange for fiat currency. When a person sells cryptocurrencies with a profit, they are obliged to pay taxes on capital income for capital gains after the actual acquisition cost or a deemed acquisition cost is deducted from the selling price.
On the other hand, if cryptocurrencies are sold at a loss, the taxpayer has from a starting point a right to deduct the losses in their taxes. There are certain exceptions, such as margin and futures trading related losses, that may result in losses being nondeductible due to the current guidelines of the Tax Administration. However such questions should always be reviewed and interpreted on a case-by-case basis.
Pitfalls of crypto taxation
As is the case with regular assets, investors and companies dealing in cryptocurrencies should take great care when planning their taxes to optimize their yearly deductions. If a tax subject calculates their yearly tax position inaccurately, does not take advantage of possible losses or the cryptocurrency they invested in after taking profits from another one crashes in price, they might end up in a situation where their tax position exceeds their own liquid capital position. That, in turn, may result in personal financial liquidity issues (e.g. not sufficient amount of fiat currency to pay for all realized taxes), which would be avoidable with careful on-going tax optimization during the tax year.
The taxation of cryptocurrencies has maintained its status quo in Finland for quite some time. Our view is that the current treatment of cryptocurrencies with the same rules as capital gains and losses should be specifically included in the Act on Income Tax, as it would bring more certainty and clarity to the tax treatment of cryptocurrencies, as opposed to relying on a court ruling or guidelines. It will, however, be interesting to see how the tax landscape for cryptocurrencies will evolve within the next few years and whether the Tax Administration will also want to participate in the bringing of clarity to the taxation of cryptocurrencies.
If you have any questions regarding the taxation of cryptocurrency, do not hesitate to contact us.
Our Associate Trainee Patrik Anthoni took part in writing this article.