Cryptocurrency Taxation in Estonia
Estonia is particularly famous in the fintech community for the fact that cryptocurrencies are regulated and that businesses can obtain licenses from the government to offer services related to virtual currencies in general. While there still may be countries around the world that does not regulate nor tax crypto profits, this is not the case in Estonia. In this article, we will go over how cryptocurrency taxation in Estonia works both for businesses and private individuals to give a complete overview.
In general, there are no specific taxes directly related to cryptocurrencies in Estonia, in fact, their taxation is no different as for other assets and profits that a business or private person can generate.
Whether you will work with cryptocurrencies using a business or as a private person, taxes are only applicable to profits generated.
Regulatory Compliance Associates is eager, available, and open to discuss your requirements – please do not hesitate to reach out to us!
According to the Estonian Tax and Customs board, profit is generated when:
- there is a change in prices, which can occur due to selling or trading virtual currencies for FIAT money or other virtual currencies;
- mining virtual currencies;
- renting out cloud storage capacity;
- paying for goods or services in virtual currencies;
- receiving as a form of payment for goods or services (and salaries).
Profit is not generated when:
- virtual currency is donated;
- buying virtual currency with FIAT money;
- transferring virtual currency between own digital wallets.
Business’ Cryptocurrency Taxation in Estonia
As mentioned before, there are no specific taxes that apply to cryptocurrencies in Estonia, therefore, businesses working in that sector will have the same taxes applied to their operation as all other Estonian businesses. However, there are some intricacies when it comes to keeping accounting in order.
Before we get into the accounting, doing business in Estonia is beneficial in general for all types of businesses as there is a 0% corporate income tax (CIT) on retained and reinvested profits. In other words, tax is only applicable when your business has made profits and made the decision to distribute dividends to the shareholders.
In Estonia, dividends are taxed with the rate of 20/80, while on regular dividend payments 14/86 is applied.
While most activities related to virtual currency trading and mining are VAT exempt, the need to register for VAT comes when your business crosses the taxable revenue threshold of €40,000 within a year. Until the threshold is met, registering for VAT is done on a voluntary basis. The general VAT rate in Estonia is 20%, while there are certain goods and services where 9% or even 0% VAT is applied.
Accounting For a Cryptocurrency Business in Estonia
The Estonian Accounting Standards Board has defined that there are four different classifications regarding cryptocurrencies:
- Virtual currencies – coins that are in a digital form and based on blockchain technology.
- Asset-backed tokens – digital markets that are based on blockchain technology and grant the owner ownership of a physical asset.
- Utility tokens – tokens that grant its owners access to a company’s products and/or services.
- Security tokens – a financial instrument that allows its buyers to invest into a specific company.
These classifications should be reflected within a business’ accounting documents and used to determine their value.
Purchase, Sale, and Exchange of Virtual Currencies as a Business
According to the International Financial Accounting Standards, virtual currencies are not regarded as money or currency, and the Estonian Income Tax Act defines it as an asset.
If your business is actively trading different virtual currencies and is not planning to hold them for a long time, then the best practice is to report them as stocks. On the other hand, if your business will be holding virtual assets for extended periods, they should be considered as financial assets and be reported in euros using the FIFO or weighted average method to report their fair values.
Cryptocurrency Mining as a Business
For tax purposes, earnings gained from cryptocurrency mining are treated as investment earnings. The time of first obtaining the virtual currency from mining is used as a reference to determine the historical price and the fair value is related to your business’ balance sheet’s date.
Renting Out Cloud Storage as a Business
If a company leases its data capacity for mining activities to other businesses instead of using it to mine virtual assets themselves, in that case, the transaction between the service provider and the customer is treated as a service sale and is subject to VAT, if applicable for the business.
Selling or Buying Services and/or Goods with Cryptocurrency as a Business
If a business sells of buys good and/or services with virtual assets, the value must be converted into euros on the date of the transaction. Similarly to renting out cloud storage capacity, these transactions must include VAT, if your business is VAT registered, like FIAT currency transactions.
In case you are looking for accounting services for your cryptocurrency business in Estonia, our sister-company Incorporate and their experienced accountants would be more than happy to help you out!
Private Person’s Cryptocurrency Taxation in Estonia
Like the way that businesses are taxed, private persons pay tax on their earned profits related to cryptocurrencies.
Before we get into the different activities related to taxation of virtual currencies as a private person, in general, a big minus in doing business as a private person in Estonia is the absence of the ability to have your retained and reinvested profits exempt from taxation.
Purchase, Sale, and Exchange of Virtual Currencies as a Private Person
In case you have made profits from trading virtual currencies as a private person by exchanging virtual currencies for FIAT money or for other types of cryptocurrencies, you have the obligation to declare your profits to the Estonian Tax and Customs Board.
Similarly to businesses, private persons are only taxed on their profits and if you have not made profits, then you do not have to report it.
However, every single sale, including an exchange, where profit is made is treated as a separate taxable event. This means that tax is applied to every profitable transaction. In addition to that, if you have suffered a loss, you cannot take it into account in your tax reporting and such transactions cannot be declared.
This is probably the next biggest downside to dealing with virtual assets as a private person in Estonia.
Cryptocurrency Mining as a Private Person
According to the Estonian Income Tac Act, virtual currency mining is considered a business activity and is treated similarly to creating a product. Mined virtual currency is taxed upon the sale, conversion or when it is put into use to purchase goods and/or services.
If a private person mines virtual currencies, the private person must declare it as business income and pay the relevant taxes. A private person is not able to deduct expenses related to mining activities from the profits, e.g. equipment or electricity.
If a private person engages in mining on a regular basis, then the private person must at least register themselves as a sole-proprietor (FIE) or establish a business to continue carrying out these activities.
Renting Out Cloud Storage as a Private Person
Renting out cloud storage capacity as a private person must be declared on the income tax declaration as rental income and is taxed with the income tax rate of 20%.
Buying Services and/or Goods with Cryptocurrency as a Private Person
In Estonia, virtual currencies can be used to pay for goods and services. If a private person uses virtual currency gained as profit for those purposes, then it must be declared in the income tax declaration.
In cases where virtual currency was received as remuneration, remuneration as a member of the management board or from dividend pay-outs which were previously taxed, then there will no extra taxation applied.
Receiving Salary in Virtual Currency as a Private Person
Salaries paid in virtual currencies in Estonia are subject to income tax. Income tax is typically withheld by the employer and paid to the tax authorities by the employer.
If a private person receives remuneration in virtual currencies and the income tax has not been withheld, then the person must convert the income into euros based on the market price on the date when the payment has been received and declare it along with the tax-free income received from the employer.
We Have Got Your Back!
We hope that this article was able to provide you with sufficient information regarding cryptocurrency taxation in Estonia and some important aspects of accounting that businesses must keep in mind during their operations.
If you have any further questions or need for any of our services related to your virtual currency business in Estonia, please do not hesitate to reach out to us for expert advice!
Disclaimer: This article provides general information, which may or may not be correct, complete or current at the time of reading. No recipients of content from this site should act on the basis of content of the article without seeking appropriate legal advice or other professional counseling.