Recently, after some time basically rejecting to define Bitcoin and subsequently other cryptocurrencies, the Danish tax authority decided on how to treat the gains earned from trading bitcoin.
SKM 2018.104 SR is the case where the Tax Authority received an inquiry about taxing earnings from Bitcoin. Askers expectation (he claiming) was that Bitcoin would merely develop into an alternative means of payment, which subsequently resulted in a considerable growth in the interest and desire to own and experiment with Bitcoin. In June 2017, the person placing the inquiry purchased Bitcoins for approx. 300,000 DKK. Four months later, the entire inventory was sold, producing a profit of approximately 550,000 DKK. 14 days later, the entire proceeds were used to purchase new Bitcoins. In addition, the Bitcoin system had undergone modification so that everyone who had owned Bitcoins as of August 1st 2017, was allocated an equivalent amount of so-called ‘Bitcoin Cash’ and therefore the aforementioned owners, retained a portion of this type of cryptocurrency.
SKAT (Danish tax authority) divided their response and have handled both the purchase of Bitcoins and the allocation of ‘Bitcoin Cash’ separately. However, the conclusion is the same; taxation of proceeds as a form of personal income.
SKAT believes that, with the inflation of Bitcoin in 2017, prior to the aforementioned having acquired its share of the cryptocurrency and along with the extensive media coverage that Bitcoin had received, the expectation had increased that profits were to be made from the acquisition. SKAT also states that Bitcoins can only be transferred electronically and thus can neither be displayed physically nor deposited into a bank. Consequently, Bitcoins have no physical usage benefits, unlike a painting or other asset that can vindicate a purpose besides a profit. In the previous statements, the Tax authority treated Bitcoin like art, so this creates a major switch in the way government sees the digital coins.
Had the sole intention been to exclusively see how Bitcoin works and how its bought and sold, one could have invested a mere 30 DKK, the minimum amount that could be exchanged for Bitcoins. Thus, it was taken into consideration that one exchanged approximately 300,000. Regarding the Part-sale – It is not possible to identify each Bitcoin in an inventory. Therefore, if you make a part-sale from a stock of Bitcoins, where part-purchases may also have been made, it is not possible to identify the acquisition cost of the Bitcoins sold by a part-sale. SKAT’s understanding is that, through part-sales, the so-called FIFO principle must apply. I.e. The acquisition cost of the initially purchased Bitcoins in an inventory must be applied when the profit is calculated on a part-sale. If you have Bitcoins divided into honorary accounts or in your wallets, the FIFO principle is applied to all inventories and not to each individual wallet / account.
Because ‘Bitcoin Cash’ is not covered by the same system as Bitcoins, but a similar system, the FIFO principle must be calculated separately for the inventory of ‘Bitcoin Cash’. Deduction for a loss through a sale of Bitcoins, which is considered to have been obtained for speculative purposes, is acknowledged as a loss and may be deducted as an equalisation deduction. By renouncement of the granted ‘Bitcoin Cash’, the acquisition cost represents 0 DKK, and consequently no loss would be possible upon the sale thereof.
SKAT’s approach toward Bitcoin in this specific example does not necessarily mean that there is speculation about all acquisitions of Bitcoins. However, based on the binding response, one can have an idea of what will be emphasised in the future.
- If you have purchased Bitcoins during the period in which the value significantly increased, you should assume that SKAT’s approach would be, to a certain degree, that it was with the intention to earn a profit. Therefore, all profits are to be taxed.
- It is possible that this consideration would be different, if one had made the acquisition with a view to making an actual purchase using Bitcoins as a currency. In this case, certain requirements may be enforced to prove what you want to purchase.
- If the acquisition is based on a professional interest, one must possess a relatively small inventory to ensure any profits will be tax-free.
Capital/profit Laws and Taxation
SKAT’s approach toward the Bitcoin system in 2014, was that it did not function in such a way that a debtor commits to accepting Bitcoins in exchange for ’real currency’ payouts or means of payment. Only the purchase or sale of Bitcoins is converted in relation to prices in “real” currency. Therefore, the laws on taxing capital and losses could not be applied. Since Bitcoin is relatively new and the ongoing development of products in the financial sector are still being developed, this view may need to be adjusted in the future. For example, it is possible to make investments according to the price index for Bitcoin, silver, etc. (such as Bookcoins).
These newer products are covered in the capital profit laws, as they can be classified as structured products, where profits are taxed and losses are deductible (source-limited loss).
Earning a Living From Bitcoin
Living income is a comprehensive, professional and systematic turnover of Bitcoins and, according to SKAT, will only apply in cases where, for example: a Bitcoin exchange takes place, or you buy and sell Bitcoins for others. These however, will be regarded as self-employed persons, and thus, the rules for individuals are not applicable.
Relocating from Denmark and Bitcoins
If one moves away from Denmark and possesses an inventory of Bitcoins, which can be regarded as being acquired for speculative purposes, taxes shall be paid, as if there had been a sale. I.e. Taxation occurs without making a profit. There is a possibility of getting the tax renounced, but this decision will be final and will not expire should one return, similar for example, to what happens with shares and bonds.
There has been a longing for a tax embodiment of Bitcoins, where the binding response is welcomed. As an individual, one should expect to be taxed on profits earned if you have purchased Bitcoins with a speculative purpose. Even if the acquisition is vindicated to be out of a professional interest. It is possible that an inventory which has been acquired many years ago should not be taxed because it was not of interest to consider investing in Bitcoin at that time. However, we have an expectation that although Bitcoins have been owned for many years, the failure to use these as a means of payment could also lead to taxation based on speculative consideration. If you have any questions about profits or losses on Bitcoins or any other currency, please contact your accountant or tax department.