15/04/2019

Sense Prevails in Virtual Currency Taxation

It is now possible to deduct losses incurred when divesting virtual currencies in taxation, and the Income Tax Act’s provisions on deemed acquisition cost can be applied to the divestment. This is the position taken by the Finnish Supreme Administrative Court in a precedent issued on 29 March 2019. The Supreme Administrative Court found that virtual currencies are assets as defined in the Income Tax Act, which means that the provisions of the Income Tax Act concerning the calculation of capital gains can be applied to divestments of virtual currencies.

The Supreme Administrative Court’s decision overturned a decision of the Central Tax Board in which the profit from the divestment of virtual currency was deemed to be other capital gains. To date, the Finnish Tax Administration has treated virtual currencies in a variety of different ways, so this Supreme Administrative Court Decision brings consistency and puts tax treatment on a better course.

Previous Tax Treatment of Virtual Currency Distorted

Current legislation is silent on virtual currencies and the taxation thereof, so many unanswered questions still remain. The Finnish Tax Administration and the Helsinki Administrative Court have issued guidelines on the taxation of virtual currencies, but they are partially contradictory and unclear. The Finnish Tax Administration’s guidelines are not binding, but they do guide taxation in practice.

Based on the Finnish Tax Administration’s guidelines, virtual currencies are not considered either cash or securities in taxation. In its overturned decision, the Central Tax Board also deemed units of virtual currencies to be payment instruments similar to fungibles. The Central Tax Board held that exchanging virtual currencies for euros, dollars or other official currencies is not a divestment of assets as referred to in section 45(1) of the Income Tax Act, but the increase in value formed in the exchange would be deemed an accrual of assets in the form of other capital gains.

A second nuisance relating to the taxation of virtual currencies has been that losses have not been deductible in taxation. As early as in 2013, the Finnish Tax Administration issued guidelines on the taxation of virtual currencies in which it stated that the principles applicable to CFDs would be applicable to the deduction of losses incurred from virtual currencies. This meant that such losses would not be deductible from personal income sources. The Finnish Tax Administration has kept to this position in later guidelines. The Central Tax Board’s decision also indicated that losses were not deductible, as the tax provisions concerning capital gains were not applied to capital gains from virtual currencies.

However, taxation should be balanced. In a symmetrical tax system, it is natural that taxable income is mirrored by deductible losses.

What Changed?

According to the Supreme Administrative Court’s reasoning, virtual currencies are not official currencies, but they do have a monetary value. Virtual currency is an asset that can be deemed taxable under the Capital Tax Act. Thus, virtual currency can be an asset as referred to in the Income Tax Act, particularly given that the Income Tax Act does not include its own definition of assets. In other words, the Supreme Administrative Court took the position that profit from the divestment of virtual currencies are not deemed, for example, profit from exchange rates or other running income from capital in accordance with the Income Tax Act.

This means that the Income Tax Act’s provisions on calculating capital gains can now be applied to the divestment of virtual currencies. The Supreme Administrative Court’s decision also means that losses from the sale of virtual currencies are, as a rule, deductible in taxation. Losses from the divestment of assets are deductible from income tax, which is comparable to the final loss of value of securities.

The Supreme Administrative Court did not take a position on taxation in situations where one virtual currency is exchanged for another. The Helsinki Administrative Court has issued a decision on this question, which became final following the Supreme Administrative Court not granting leave to appeal. Following this decision, exchanging one virtual currency for another (of for any other asset) is treated the same way in taxation as the divestment of a virtual currency for an official currency.

Virtual currencies are a new phenomenon, and regulation is still taking shape. In situations that are open to interpretation, it is wise to confirm tax treatment in advance, for example, through a preliminary ruling or preliminary discussion. In particular, loss-making divestments of virtual currencies from earlier years may be a good reason to apply for an amendment of one’s taxation.