Taxation of virtual currencies

This guidance concerns the personal, corporate and value-added taxation of virtual currencies. In this guidance, the term 'virtual currency' refers to all virtual currencies, crypto currencies, bitcoins and their equivalents.

This version of the guidance now also includes interpretations of a range of practical situations relating to the taxation of virtual currencies. Moreover, the chapter concerning corporate taxation has been significantly expanded. The guidance now also addresses value-added taxation in the context of virtual currencies.

From the perspective of personal taxation, the guidance also addresses the taxation of different kinds of virtual currencies used in online games, with the exception of games run by actual gambling companies.

1 Introduction

1.1 Overview of the nature of virtual currencies

Virtual currency is a type of virtual money, virtual product or virtual instrument created by means of a peer-to-peer network that is not accepted as legal tender in Finland. Some virtual currencies can be stored in a form that outwardly resembles a coin or another physical element, but this does not alter the virtual nature of the currency. Virtual currencies transferred across peer-to-peer networks are usually traded between the users without a middleman, such as a bank in normal monetary transactions. There is also no official body to ensure the stability of virtual currency.

There are no official regulations on virtual currencies or their use, which is why the use of virtual currencies is a matter of freedom of contract between the parties involved. Virtual currencies can therefore be traded, subject to an agreement between the seller and the buyer, for official currencies, other virtual currencies, goods or services. There is no obligation to accept virtual currency as a means of payment, as virtual currencies are not legal tender. Virtual currencies are also widely used for investment purposes, in which case expectations of returns are based on an increase in the value of the virtual currency.

The Finnish Tax Administration's definition of 'virtual currency' covers all virtual currencies that do not have legal tender status regardless of whether their value is tied to an official currency. In this guidance, the term 'virtual currency' refers to all different kinds of virtual currencies.

This guidance does not address winnings from slot machine games, betting or other games subject to the Finnish Act on Tax on Lottery Prizes as such. For example, the taxation of winnings from poker games is discussed in the Finnish Tax Administration's guidance on the taxation of poker winnings, which can also be applied to games involving virtual currencies where appropriate. The special characteristics of the taxation of virtual currencies nevertheless need to be taken into consideration in these cases.

This guidance also does not address securities or derivatives trading on an official stock exchange where the fluctuations in value are tied to changes in the value of virtual currency. Such securities and derivatives trading is subject to the regulations governing securities and derivatives and the Finnish Tax Administration's guidance. The taxation of profits from the sale of securities is discussed, for example, in the Finnish Tax Administration's guidance on tax on the sale of securities and profits and losses from the sale of assets in the income taxation of natural persons. Tax payable in the context of derivatives is discussed in the Finnish Tax Administration's guidance on the taxation of derivatives.

1.2 Overview of the income taxation of virtual currency

In the context of income taxation, trading in virtual currencies is deemed to be based on an agreement between the seller and the buyer. Virtual currencies are therefore not equated to official currencies or securities in taxation. In practice, there are no restrictions on the use of virtual currency, and the use of virtual currency is a matter of freedom of contract between the parties involved. Due to these reasons and in the absence of more detailed regulations, virtual currency is treated as another, undefined kind of non-physical instrument the use of which is based on an agreement between the parties involved when applying income tax laws.

The use of virtual currency in any context triggers taxation for any increase in its value. Every increase in the value of virtual currency triggers taxation separately, for example when

a) virtual currency is traded for any official currency. Whether the funds remain in an account administered by a broker, for example, or are transferred to the taxpayer's account is irrelevant.

b) virtual currency is spent by paying it to another party in return for goods or services.

c) virtual currency is traded for another virtual currency.

Every instance of spending, selling or trading virtual currency that triggers taxation is treated as a separate transaction in taxation. Every transaction in which virtual currency is used causes the value of the currency to increase or decrease. If virtual currency is acquired through multiple transactions, the increase or decrease in the value of the currency resulting from each transaction must be calculated separately. When calculating changes in value, virtual currency is deemed to have been spent in the same order as it was acquired, unless the taxpayer is able to prove otherwise.

Taxpayers can also contribute to the creation of new virtual currencies or units of existing virtual currencies by means of mining. Any gain from mining triggers income taxation. The income is deemed to have been earned when the reward is deposited into the miner's account or virtual wallet or made otherwise available to the miner. The taxation of virtual currency originating from mining is discussed in more detail in Sections 2.4 and 3.2 below.

In the taxation of taxpayers other than those liable to keep books, trading between virtual currencies is deemed to take place at fair value in situations where the Income Tax Act applies. 'Fair value' is the value of the virtual currency in euros at the time of the trade.

If it is not possible to confirm a value in euros for neither currency in a situation involving trading between two virtual currencies, the transaction is, in the absence of other evidence, deemed to have been based on the original acquisition cost of the virtual currency. In such cases, the original acquisition cost of the virtual currencies traded away is divided to make up the acquisition cost of the new virtual currencies acquired in the trade. No taxable profit or non-deductible loss is therefore generated in practice in such circumstances. A taxable profit or a non-deductible loss only materialises when the virtual currency received in the trade is spent.

Taxpayers who have a legal obligation to keep books must observe the principles of valuation in the context of virtual currency trading set out in more detail in Chapter 3, according to which trading between virtual currencies is valued at the rate in force at the time of the trade.

The income tax payable on virtual currency is always calculated in euros in different situations as explained in more detail below.

In the Finnish tax system, taxable income is calculated by income source. There are three income source categories: business, agriculture and other activities. The source of the income determines the applicable legal provisions: business income is taxed according to the Business Tax Act (360/1968), agricultural income according to the Agricultural Income Tax Act (543/1967) and other income (from what is known as a "personal income source") according to the Income Tax Act (1535/1992). The scope of application of the aforementioned acts depends on the nature of taxpayers' income-generating activities.

Virtual currency can be deemed to originate from any of the three income sources depending on its nature and intended purpose. The origin of the virtual currency determines its tax treatment. In particular, the income source category affects the deductibility of losses related to virtual currencies.

Although the rule of thumb is that the choice of the applicable law is not dependent on the legal form of the income earner, the Income Tax Act is usually applied in the income taxation of natural persons. Businesses are taxed according to the Business Tax Act if their operations satisfy the legal definition of business. Any operations that do not satisfy the legal definition of business and cannot be deemed to be agricultural operations as referred to in the Agricultural Income Tax Act are considered "other sources of income" and taxed according to the Income Tax Act.

2 Virtual currency in personal taxation

2.1 Overview of the taxation of virtual currencies according to the Income Tax Act

Pursuant to Section 29 of the Income Tax Act, taxable income comprises any income earned by a taxpayer in the form of money or benefits of monetary value. All income earned in the form of money or benefits of monetary value is taxable unless expressly decreed to be tax-exempt.

Pursuant to Section 32 of the Income Tax Act, taxable income from capital include any profit made on an asset or the sale of an asset as well as any other income that can be deemed to have accumulated as a result of an asset. Pursuant to Section 110 of the Income Tax Act, income is deemed to have been earned during the tax year in which it was withdrawn, deposited into the taxpayer's account or made available to the taxpayer otherwise. Any realised increase in the value of virtual currencies constitutes a taxable income from capital depending on the circumstances as explained in more detail below.

Virtual currencies do not constitute securities as referred to in the Income Tax Act, as trading in virtual currencies is based on an agreement between the seller and the buyer. Due to the contractual nature of virtual currency, the Income Tax Act's provisions on the taxation of profits from the sale of assets do not apply to tax liability in the context of virtual currency. This is why the acquisition cost assumption referred to in Section 46(1) of the Income Tax Act and the tax exemption of low-value sales (combined sale prices not exceeding EUR 1,000 during a single tax year) laid down in Section 48(6) of the Income Tax Act, for example, cannot be applied to transactions that trigger taxation due to an increase in the value of virtual currencies.

In the context of taxation based on the Income Tax Act, losses are, as a rule, non-deductible. Pursuant to Section 50(3)(2) of the Income Tax Act, any loss on a security that can, due to bankruptcy or another similar reason, be considered final can nevertheless be deducted as a capital loss.

As virtual currencies do not constitute securities as referred to in the Income Tax Act, any loss resulting from a decrease in value when using virtual currency cannot be deducted in income taxation pursuant to the provisions on capital losses laid down in Section 50 of the Income Tax Act. A decrease in the value of virtual currency is not deductible in income taxation on other grounds either. The Finnish Tax Administration applies the same principle to all kinds of virtual currencies. (See also decision No 2017/54 of the Central Tax Board; the decision is not final.)

From the perspective of taxation, trading in virtual currencies resembles contract-for-difference (CFD) trading. The Supreme Administrative Court found in its Yearbook ruling No 2010:74 on the taxation of contracts for difference that CFD-related expenses did not constitute the kinds of expenses incurred from acquiring or managing income referred to in Section 54 of the Income Tax Act or the kind of capital loss or other deductible loss comparable to a capital loss referred to in Section 50 of the Income Tax Act. The ruling is an example of a situation where taxation is asymmetrical: income is taxable but losses cannot be deducted.

Supreme Administrative Court's ruling No 2010:74

'A' engaged in securities trading as a sideline and invested in various securities and investment instruments, such as CFDs (contracts for difference). CFDs are contracts for difference with no expiry date and no predetermined price. The price varies according to the value of the underlying financial instrument. CFDs are not traded on publicly listed markets. The Central Tax Board's preliminary decision, which is final in this respect, states that any profit made by 'A' on the CFDs constitutes income from capital pursuant to Section 32 of the Income Tax Act. The Supreme Administrative Court also concurred with the Central Tax Board in so far as the Board had found that expenses incurred by 'A' from the CFDs did not constitute the kinds of expenses incurred from acquiring or managing income referred to in Section 54 of the Income Tax Act and were not deductible as the kind of capital loss or other loss comparable to a capital loss referred to in Section 50 of the Income Tax Act. Preliminary decision for tax years 2009 and 2010. Income Tax Act, Sections 50 and 54

Any realised increase in the value of virtual currencies is taxed as income from capital pursuant to Section 32 of the Income Tax Act. The tax exemption provision laid down in Section 53(1)(8) of the Income Tax Act, which concerns small and infrequent exchange rate gains from official currency, cannot be applied to the taxation of virtual currencies. No part of a realised increase in the value of virtual currencies is tax-exempt. The provision laid down in Section 54(b) of the Income Tax Act, which concerns the deductibility of currency exchange losses, also does not apply to the taxation of virtual currencies.

Every instance of selling or trading virtual currency that triggers taxation is treated as a separate transaction in income taxation. In the context of the income taxation of virtual currencies, this means that all increases in value that have materialised during a tax year are taxed as income from capital and any decreases in value are treated as separate non-deductible items. These transactions cannot be offset against each other. Every transaction in which virtual currency is used causes the value of the currency to increase or decrease. If virtual currency is acquired through multiple transactions, the increase or decrease in the value of the currency resulting from each transaction must be calculated separately.

2.2 Trading between legal tender and virtual currency

Virtual currency is traded between a buyer and a seller, although a broker may be used. The trading does not take place on official securities markets or other publicly listed markets, and the terms and conditions of trading are therefore not laid down in official marketplaces' rules.

Trading virtual currency for official currency triggers taxation for any change in the value of the virtual currency. Any increase in value is deemed to have accumulated as a result of an asset and is taxed as income from capital. When calculating changes in value, virtual currency is deemed to have been spent in the same order as it was acquired, unless the taxpayer is able to prove otherwise. The order in which virtual currency is spent can be monitored on the basis of individual virtual wallets or accounts, but evidence of this must be presented to the tax authorities upon request.

Any increase in the value of virtual currency constitutes taxable income from capital, while losses resulting from a decrease in value are non-deductible in income taxation.

2.3 Spending of virtual currency on goods or services

Some businesses accept virtual currency as a means of payment. From the perspective of taxation, using virtual currency to pay for goods or services constitutes trading based on an agreement, whereby virtual currency is traded for goods or services. The transaction triggers taxation for any increase in the value of the virtual currency.

2.4 Taxation of virtual currency mining gains

2.4.1 Proof-of-work protocol

The virtual currency system can generate new currency units as a result of a complex computer algorithm. This is known as "mining", and it allows members of individual virtual currency networks to acquire new virtual currency units by making the processing power of their computer available to others. These members of the network are given new virtual currency units generated by the algorithm as a reward for validating transactions. In practice, new virtual currencies are distributed between the members of the network at random (proof-of-work protocol). Those who contribute to mining can also be given miner fees for individual transactions.

Income earned in the form of virtual currency from the aforementioned kind of mining activity does not constitute capital from income under the Income Tax Act. Pursuant to Section 61 of the Income Tax Act, earnings constitute income other than income from capital. Income from mining therefore counts as earnings.

Income from mining triggers liability for tax (Income Tax Act, Section 110) when the miner gains possession of the income, i.e. when the virtual currency or fee is deposited into the miner's account or virtual wallet or is otherwise made available to them. The income is valued transaction-specifically; taxation is triggered whenever income is generated from mining.

However, miners can also calculate their income from mining per day or per month on the basis of the average exchange rate of the period in question. Taxpayers need to be consistent with the period they have chosen throughout the year and be able to explain their valuation principles upon request. Income from mining can be valued on the basis of any known virtual currency exchange. Taxpayers need to choose one exchange and stick to the valuations on that exchange.

The value of any virtual currencies earned from mining (= gross income) also constitutes their acquisition cost in taxation.

2.4.2 Proof-of-stake protocol

The accumulation of new virtual currencies can also be based on blocking existing virtual currencies momentarily to protect the virtual currency in question. The reward for this can be, for example, an increase of 5% per annum on top of a miner's existing virtual currency balance, paid on a daily basis (proof-of-stake protocol). From the perspective of taxation, this constitutes a direct gain on a previous asset, i.e. the miner's previous virtual currency balance, and is therefore regarded as income from capital.

Taxation is triggered when the miner gains possession of the new units of virtual currency. The income is valued at the fair value of the virtual currency in question at that moment. The miner's gross income is also equivalent to the acquisition cost of the new virtual currency. The acquisition cost of the miner's old virtual currency remains unchanged. The same principle can also be applied to other situations where a taxpayer's income is based solely on income accumulated on the basis of previously owned virtual currency.

2.4.3 Deducting expenses incurred from mining

Any direct costs incurred from accumulating taxable income can be deducted from the income in taxation. Mining (according to the proof-of-work protocol) is a highly energy-intensive activity, and the cost of the electricity involved is often considerable. For taxation purposes, miners need to be able to specify which portion of their electricity consumption is due to the use of a computer or other device for accumulating the income from mining. Other electricity consumption from the use of the miner's computer is not tax-deductible.

Evidence of the household's electricity consumption must be presented upon request. Miners need to be able to reliably verify the portion of their electricity consumption that is attributable to mining as well as the household's electricity consumption for other purposes. For example, they can have a separate meter for the electricity consumption of the device used for mining. Any portion of the electricity consumption of the computer or other device used by a miner for purposes that are unrelated to the miner's earnings is not tax-deductible. In the absence of reliable proof, the portion of electricity consumption related to earnings can be estimated.

The acquisition cost of any equipment used for mining can also be deducted from the miner's earnings. However, the miner must have evidence of the purposes for which the equipment is used and how frequently. Any use of the equipment for personal purposes and the number of computers in the household also have relevance. Any minor use of a computer for personal purposes (such as online banking) does not make the miner ineligible for the deduction.

If a computer or another device is used for earning an income from mining, a percentage of the acquisition cost of the computer can be deducted as follows:

25%	evidence of occasional use for earning an income from mining
50%	evidence of regular use for earning an income from mining
100%	evidence of the computer being used primarily for earning an income from mining

If the expected useful life of the device is more than three years, the acquisition cost is depreciated gradually. Up to 25% of the remaining cost can be depreciated. Any devices the acquisition cost of which does not exceed EUR 1,000 can usually be expected to have a useful life of no more than three years, in which case the cost can be deducted in one lump sum. Any portion of the use of the device for purposes that are unrelated to earning an income are not deductible.

Any expenses incurred from mining are related to the miner's earnings from mining and can therefore be deducted from the miner's taxable income from mining. Expenses incurred from mining cannot be deducted at a later date in connection with tax due on any increase in the value of the virtual currency.

2.5 Reconciling virtual currencies and profits from the sale of virtual currencies

Pursuant to Section 110 of the Income Tax Act, profits from the sale of assets are taxed during the tax year in which the transaction occurred. Income tax liability is always calculated in euros, even if virtual currency is used to make the payment. This refers, for example, to situations where securities are traded for virtual currency.

The asset is always valued at its fair value in euros, even if the payment is made in virtual currency. Taxpayers must have evidence of the fair value of the underlying asset in terms of legal tender (euros) at the time of the transaction. Any virtual currency used in connection with the transaction is converted to real money at the rate in force at the time of the transaction. In other words, the profit or loss from the sale of the asset is valued in euros at the moment of the transaction.

Any increase in the value of the virtual currency used in the transaction is taxed separately as the taxpayer's income from capital. Taxation is triggered by the increase in the value of the virtual currency at the time of the transaction as explained above in Section 2.1. Any losses incurred from transactions concluded in virtual currency cannot be deducted in taxation in so far as the loss is due to a change in the value of the virtual currency.

2.6 Special circumstances

2.6.1 Acquisition cost of virtual currency when it is split

Sometimes the blockchains of virtual currencies are forked or split. In these circumstances, any owners of the original virtual currency are given new virtual currency that amounts to their original holding or a percentage thereof for free without losing any of their original virtual currency. From the perspective of taxation, the acquisition cost of the original virtual currency remains unchanged, and the acquisition cost of the new currency is EUR 0.00.

2.6.2 Dividend payments in virtual currency from unlisted companies

Instead of official currency, businesses can choose to pay dividends in the form of, for example, shares or virtual currency. The dividend payment is deemed to amount to the fair value of the virtual currency at the time of the transaction. From the perspective of taxation, the acquisition cost of any dividends paid in virtual currency – similarly to dividends paid in the form of shares – is their fair value at the time of the transaction. In other respects, the principles applicable to normal dividends also apply to the taxation of dividends paid in virtual currency.

2.6.3 ICO (initial coin offering)

ICO is a means for companies involved in a blockchain to sell their own premined virtual currency to investors. If the venture is successful and the value of the virtual currency increases, the investors make a profit. In such circumstances, the investors are deemed to have purchased virtual currency and any subsequently realised increase in the value of the currency or the investors' other income from the currency is therefore subject to taxation of income from capital. Losses incurred from virtual currency are never deductible in income taxation.

The terms and conditions of ICOs vary considerably. Investors' tax liability is therefore determined on the basis of the true nature of their investment, taking the special considerations concerning the taxation of virtual currencies into account.

2.6.4 Income tax payable on inherited or gifted virtual currency

Virtual currency can be inherited or received as a gift. From the perspective of taxation, the acquisition cost of any such virtual currency is the value confirmed for inheritance and gift tax purposes. If the virtual currency is spent, tax liability is determined on the basis of the difference between the fair value of the currency at the time of the transaction and the value used for inheritance and gift tax purposes. Any increase in the value of the virtual currency is taxed as income from capital ; losses are not tax-deductible.

2.7 Taxation of earnings from online games

There are numerous – mostly recreational – games and programs on the internet that use their own currencies (such as gold, gemstones or coins) and earnings from which do not count as lottery winnings. In this guidance, all online games and programs are referred to as games regardless of the actual nature of the program in question.

Many online games give players (users of the program) the chance to earn currency by their actions in the game. Some games also allow the game's internal currency to be converted to real money or virtual currency. Players can also earn by selling attributes that they have developed in the game, goods that they have purchased in the game or the game's internal currency to other players for official currency, virtual currency or other benefits of monetary value.

Pursuant to Section 110 of the Income Tax Act, income is deemed to have been earned during the tax year in which it has been withdrawn, deposited into the taxpayer's account or made available to the taxpayer otherwise. In this guidance, these kinds of games and any virtual currency associated with the games are considered one and the same. This is why any virtual income from games is only considered to have been earned pursuant to Section 110 of the Income Tax Act when the player cashes out from the game. Taxation on income cashed out from online games is triggered when the player converts the game's internal currency or other benefit associated with the game to external virtual currency, real money or other assets of monetary value. Income from online games is valued and taxed according to the fair value of the asset received in return for the game's internal currency when the player cashes out from the game.

Earnings from online games are based on players' personal activity and therefore taxed as earned income. Whether a player uses real money to play the game is irrelevant. Players can only deduct the portion of their investment on which their earnings are based in their taxation and must be able to provide evidence of their expenses.

In the event that a player generates no taxable income from a game, the loss of their investment or other losses incurred from playing the game are not tax-deductible. Such losses constitute losses from recreational activities, which are considered normal living expenses. Pursuant to Section 31(4) of the Income Tax Act, normal living expenses are not tax-deductible.

2.8 Declaring income for the purposes of personal taxation

The use of virtual currency in any context triggers income tax liability for any increase in its value. There are always two parties involved – the seller and the buyer – when virtual currency is traded.

Taxpayers in Finland have a responsibility to declare their taxable income to the Finnish Tax Administration of their own initiative. Income must be declared regardless of whether it is earned in Finland or abroad. Whether income is earned in euros, other official currency or in another form of an increase in value is also irrelevant. Any income earned during a specific tax year must be declared, at the latest, in that year's tax return.

Taxpayers can also make prepayments on income earned from the use of virtual currency. Prepayments can be set up on the Finnish Tax Administration's website.

Any taxable income from capital from the use of virtual currency are declared under "other income from capital". The type of income, payer and amount are specified in Section 15 of the tax return form (further information). All receipts must be kept for potential inspections.

Any income from mining is declared under "other earned income". Expenses incurred from mining are declared separately under "expenses incurred from earning an income".

Taxpayers who are not obligated to keep books need to keep a record providing sufficient detail for taxation purposes. Taxpayers who deal in virtual currency must keep a record of their income from the use of virtual currency regardless of the value of their virtual currency portfolio or the number of transactions. Keeping a record is mandatory for taxpayers to be able to satisfy their responsibility to declare their income. Pursuant to Section 7 of the Act on Assessment Procedure, taxpayers need to declare their taxable income in their tax return. Pursuant to Section 11 of the Act on Assessment Procedure, taxpayers need to be able to present evidence of their income as well as receipts. The Finnish Tax Administration has issued a decision on taxpayers' responsibility to keep records.

If a taxpayer is unable to account for their income and expenses, assessment can, pursuant to Section 27 of the Act on Assessment Procedure, be based on estimates of the taxpayer's known net earnings and expenses. It is therefore important from the perspective of taxpayers' own legal rights to keep detailed records of any use of virtual currency as well as receipts of transactions. Transactions can be recorded, for example, in a table and appended to the tax return. The Finnish Tax Administration can request to see taxpayers' receipts.

Pursuant to Section 12 of the Act on Assessment Procedure, taxpayers' records must be based on receipts and kept for a period of six years from the beginning of the year following the end of each tax year.

3 Virtual currency in corporate taxation

Virtual currency can feature in a company's business in many ways. For example, the company's business or a part thereof can be based on mining or trading in virtual currency. Companies can also accept virtual currency as a means of payment and use virtual currency to pay for goods and services supplied by other companies.

The income source category is determined on the basis of the nature of activities relating to virtual currencies. All realised increases in the value of virtual currencies constitute taxable income for businesses regardless of the income source category in question. Any expenses incurred from earning and managing the income are, as a rule, tax-deductible. However, decreases in the value of virtual currency and other losses can only be deducted from business income.

As the use of virtual currency is, from the perspective of income taxation, based on an agreement between the users, the tax-deductibility of decreases in the value of virtual currency and other losses is determined similarly to decreases in the value of receivables. The tax-deductibility of decreases in the value of receivables is discussed in more detail in the Finnish Tax Administration's guidance on the deductibility of decreases in the value of receivables in the taxation of business income.

As virtual currency is not legal tender, the provisions of Sections 5(12) and 18(3) of the Business Tax Act on exchange rate fluctuations do not apply.

3.1 Buying and selling of virtual currency

A company's business can be based entirely or partially on trading in virtual currency. In such circumstances, the company's income consists of profits from the sale of virtual currency. In this guidance, trading in virtual currency refers to buying and selling virtual currency so that official currency is converted to virtual currency and vice versa as well as trading between two virtual currencies.

A company's investments that are based on virtual currency are considered to constitute business activity if they are continuous, systematic and active, carry a financial risk and are aimed at making a profit. All of these criteria need to be satisfied for investments to be deemed business activity. Companies often make investments as part of their business.

If a company's trading in virtual currency satisfies the definition of business activity, its virtual currency is, as a rule, considered to constitute current assets. Any increase in the value of virtual currency included in a company's current assets constitutes taxable income (Business Tax Act, Section 5(1)), and any decreases in value can be deducted directly from current earnings (Business Tax Act, Section 8(1)).

Companies can also invest their business assets in virtual currency on a temporary basis. In such circumstances, the virtual currency is, as a rule, considered to constitute financial assets. Any increase in the value of virtual currency included in a company's financial assets constitutes taxable income (Business Tax Act, Section 5(5)), and any decreases in value can be deducted directly from current earnings (Business Tax Act, Section 17(1)(2)).

If a company's trading in virtual currency does not satisfy the definition of business activity, the activity is taxed according to the Income Tax Act. All realised increases in the value of virtual currency also constitute taxable income under the Income Tax Act. However, decreases in value are not tax-deductible, as explained above in Section 2.1.

3.2 Virtual currency mining by businesses

Businesses can also engage in virtual currency mining as referred to in Section 2.4 and be rewarded in virtual currency.

Any virtual currency received as a reward for mining is deemed, pursuant to Section 19 of the Business Tax Act, to have been earned during the tax year in which the virtual currency was cashed out as money, receivables or other benefits of monetary value. Any virtual currency earned from mining therefore, as a rule, constitutes income for the tax year in which it is cashed out. If, however, a company's reward for mining is based, for example, on blocking the company's virtual currency for the exclusive use of a network for a certain period of time, the company's income from mining is deemed to accumulate gradually over the period in question and, as a rule, recognised as income during that period of time.

The asset category of virtual currency received as a reward for mining depends not only on the method of mining but also, for example, the nature of the company's business. The income source category and the asset category of such virtual currency are therefore determined on a case-by-case basis. For example, if a company's mining activity is based on the proof-of-work protocol, any virtual currency received as a reward can be equated to income from the sale of goods or services, as it is based on the company's use of its resources. If a company's virtual currency mining activity is categorised as a source of business income, any virtual currency received as a reward is usually deemed to constitute financial assets.

3.3 Transactions concluded in virtual currency

In addition to euros, companies can accept payment for their goods and services in virtual currency. Any virtual currency that a company earns from the sale of goods or services that constitutes a source of business income is, as a rule, deemed to constitute the company's financial assets. If the sale of goods or services is related to activity taxed according to the Income Tax Act, any virtual currency earned from the same is also deemed to belong to the personal income source category.

If a company later, for example, trades its virtual currency for official currency or spends it on goods or services, the transaction is deemed to constitute a contractual trade in taxation. The transaction triggers taxation on any change in the value of the virtual currency. The company can therefore make either a profit or a loss from the transaction, the tax treatment of which depends on the virtual currency's income source category.

Any profit generated from trading virtual currency included in a company's financial assets constitutes taxable income (Business Tax Act, Section 5(5)), and losses can be deducted directly from current earnings (Business Tax Act, Section 17(1)(2)). Any increase in the value of virtual currency that is categorised as a company's personal income also constitutes taxable income for the company. However, decreases in the value of virtual currency are not, due to the contractual nature of virtual currency, deductible in taxation based on the Income Tax Act, as has been explained above in Section 2.1.

The acquisition cost of any goods or services purchased using virtual currency is converted to euros at the rate in force at the time of the transaction.

3.4 Determining of the acquisition cost of virtual currency

For taxation purposes, the acquisition cost of assets must be determined in euros. Any virtual currency in a company's possession therefore also needs to be valued in euros.

The Accounting Board addressed the accounting process associated with digital crypto currencies in an opinion issued on 23 October 2012 (No 1895). According to the Accounting Board's opinion, when accepting crypto currency, the value of these instruments is converted to Finnish currency at the rate in force on the day of the transaction for accounting purposes, where such a rate exists, or entered into books according to a value agreed between the parties.

For corporate taxation purposes, virtual currency is valued according to the Accounting Board's opinion, i.e. at the rate in force on the day of the transaction.

The acquisition cost of sold or traded virtual currency depends on the income source category and, in the case of business income, also the asset category. Assets can be categorised as financial assets, current assets, investment assets or fixed assets. As has been explained above, virtual currency usually constitutes either current assets or financial assets for businesses.

Current assets

Pursuant to Section 14(2) of the Business Tax Act, the acquisition cost of current assets is determined on the basis of the FIFO principle, unless the taxpayer is able to prove otherwise. In other words, the options are either the asset's actual acquisition cost or the FIFO principle. This means that the acquisition cost of current assets cannot be determined on the basis of the LIFO principle, for example, in taxation (see, for example, the Supreme Administrative Court's rulings from 1999 (record No 2208) and 2006 (record No 2469)).

Taxpayers can write off the acquisition cost of virtual currency included in their current assets if the conditions laid down in Section 28 of the Business Tax Act are satisfied.

Financial assets and assets taxed in accordance with the Income Tax Act

There are no separate regulations for determining the acquisition cost of financial assets. The acquisition cost of financial assets is therefore determined on a case-by-case basis according to the actual cost incurred. The acquisition cost of any virtual currency that belongs to the personal income category is also determined in the same way, on a case-by-case basis according to the actual cost incurred.

4 Virtual currency in value-added taxation

4.1 Financial services in value-added taxation

The general scope of value-added taxation in terms of territorial scope and the goods and services subject to tax is laid down in Section 1 of the Value Added Tax Act (1501/1993). Pursuant to the provision, value-added tax is payable to the State on the sale of goods and services in the conduct of business that takes place in Finland.

No value-added tax is payable on the sale of financial services (Value Added Tax Act, Section 41). The concept of 'financial services' is defined in Section 42 of the Value Added Tax Act. Financial services include

• granting of credit and other financial arrangements;
• credit management by the person granting the credit;
• payment transactions;
• currency exchange;
• dealing in securities; and
• provision of guarantees.

Pursuant to Article 135(1)(d) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ("the VAT Directive"), Member States must exempt transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.

Pursuant to Article 135(1)(e) of the VAT Directive, Member States must also exempt transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors' items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest.

Payment transactions

Pursuant to Section 42(1)(4) of the Value Added Tax Act, payment transactions constitute financial services. Tax-free payment transactions include, for example, brokerage as well as the management and issuance of means of payment. Payment brokerage includes, for example, bank transfers. Means of payment include, for example, credit cards and traveller's cheques.

Currency exchange

Financial services also include currency exchange (Value Added Tax Act, Section 42(1)(5)). Currency exchange is tax-free whether on the taxpayer's own account or on account of a client. In addition to selling and brokering currency, the tax exemption is deemed to extend to any services offered by businesses whose clients – usually banks – trade currency and currency forwards with other clients (Supreme Administrative Court's ruling No 1098 of 5 May 2003).

4.2 Case law of the Court of Justice of the European Union

The Court of Justice of the European Union (CJEU) has addressed the value-added tax treatment of bitcoins in its case law. In Case C 264/14 (Hedqvist), Mr Hedqvist wished to provide, through a company, services consisting of the exchange of traditional currency for the 'bitcoin' virtual currency and vice versa. The CJEU ruled that Mr Hedqvist's transactions that consisted of the exchange of traditional currency for units of the 'bitcoin' virtual currency and vice versa constituted the supply of services for consideration within the meaning of the VAT Directive, as they consisted of the exchange of different means of payment and as there was a direct link between the services supplied and the consideration received by Mr Hedqvist.

According to the CJEU, these transactions were exempt from value-added tax pursuant to Article 135(1)(e) of the VAT Directive. The CJEU ruled that transactions to exchange a virtual currency 'bitcoin' for a traditional currency and vice versa, in return for payment of a sum equal to the difference between the purchase price paid by the operator and the sale price obtained by him, constitute the provision of services for consideration and are exempt from value-added tax.

4.3 National case law

The Central Tax Board ruled in its decision No 2014/34 (legally binding) that, from the perspective of value-added taxation, bitcoins constitute a means of payment. The case involved a company that operated a technical platform (marketplace) for selling and buying the bitcoin virtual currency. The company provided the platform for trading bitcoins so that virtual currency was transferred directly from one user to another. According to the Central Tax Board, any fees charged for the conversion of bitcoins to official currency or vice versa constitute commissions charged for financial services as referred to in Section 42 of the Value Added Tax Act and are therefore exempt from value-added tax.

Central Tax Board's ruling No 2014/34

X Ltd provided a technical platform for buying and selling the bitcoin virtual currency. The bitcoins were traded for official currency. X Ltd charged a commission from the buyers and sellers of bitcoins, which was a certain percentage of the sale and purchase price of the bitcoins. From the perspective of value-added taxation, bitcoins constitute a means of payment. The commission charged by X Ltd therefore constituted remuneration for financial services as referred to in Section 42 of the Value Added Tax Act and the kinds of transactions referred to in Article 135(1)(d) of the VAT Directive (2006/112/EC). X Ltd did not have to pay value-added tax on the commissions. Preliminary ruling for the period from 20 August 2014 until 31 December 2016.

Value Added Tax Act, Sections 41, 42(1)(4) and 42(1)(5)

VAT Directive (2006/112/EC), Article 135(1)(d)

Legally binding