Taxation of virtual currencies

This is an unofficial translation. The official guidance is drafted in Finnish and Swedish languages.

This guide discusses the tax treatment of virtual currencies from the perspectives of individual income taxes, business and corporate taxes and VAT. The words “virtual currency” below refer to all virtual currencies, crypto currencies, various virtual coins, etc.

From the perspective of individual income tax, the guidance also addresses the taxation of different kinds of virtual currencies used in online games, with the exception of the games that are run and managed by gambling companies.

After the changes that came into force on 1 January 2020 regarding the tax rules on source of income, which affects the income taxes of corporate entities, we have updated the guide. As a result, sections 1 and 3 below contain a number of updates. In addition, section 2.8 below now contains more information on how positions in virtual currencies should be reported on tax returns. For more information on the newly changed tax rules, see “guide on source-of-income rules for dividing the income taxes of certain corporate entities” – Eräiden yhteisöjen tulolähdejaon poistaminen (in Finnish and in Swedish).

1 Introduction

1.1 Overview of the nature of virtual currencies

The Finnish act on virtual currency providers (Laki virtuaalivaluutan tarjoajista 572/2019) contains a definition of virtual currency, translated into English as follows:

For the purposes of this Act, the meaning of the term virtual currency refers to a value in a computer-coded digital format

1. for which no central bank or other public authority has been the issuer, and which is not legal tender as a means of payment;
2. with which a person can settle a liability i.e. pay up the liability; and
3. which can be electronically transferred, electronically saved, and electronically exchanged.

The scope of application of this act comprises the business operations of all virtual currency providers in Finland.

There are no further official regulations on virtual currencies or their use, and consequently, all dealings with virtual currencies generally fall into the scope of “freedom of contract” between the parties involved. As a result, virtual currencies can be traded, subject to an agreement between the seller and the buyer, for legally established currencies, for other virtual currencies, and for 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 this activity, the expected returns are based on increases in the value of the virtual currency.

All virtual currencies that coincide with the definition of § 2 of the act on virtual currency providers, that do not have legal tender status regardless of whether their value is tied to a legally established currency, are treated as virtual currencies by the Finnish Tax Administration. In this guidance, ‘virtual currency’ refers to all different kinds of virtual currencies.

This guide 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.

In the same way, this guide does not address the trading with securities or derivatives on a stock exchange where the fluctuations in value are tied to changes in the value of a virtual currency. The trading activity with those securities and derivatives is subject to the regulations governing securities and derivatives and the Finnish Tax Administration’s guidance. 

For more information on capital-gains taxes, see the Tax Administration’s guide on tax on capital gains arising from the sale of securities (in Finnish and Swedish, link to Finnish), 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 guide on the taxation of derivatives.

1.2 Overview of the income taxation of virtual currency

In accordance with the ruling of the Supreme Administrative Court no 2019:42 (29 March 2019), the correct treatment of virtual currencies is that they are assets as referred to in § 45, subsection 1 of the act on income tax. This means that the tax rules on capital gains are applicable.

Supreme Administrative Court ruling 2019:42
The taxpayer “A” had made an investment in Ether, a virtual currency. Positions held in virtual currencies may be used for purposes of exchange, payment, consideration to be paid in exchange for goods or services. They can additionally be used as assets to invest in. Their value is determined by law of supply and demand.

The taxpayer “A” planned to sell his Ether units so as to receive a position in a legally established currency in their place, i.e. either €€ or U.S. dollars. For tax purposes, the capital gain that arises from this selling must not be regarded as a foreign-exchange gain (§53, subsection 8, act on income tax) nor as “other capital income” (§32, act on income tax). Instead, it must be regarded as capital-gains income. If “A” held a certain number of Ether units and sold all of them or some of them, that must be regarded as a sale of an asset within the meaning of § 45, subsection 1 of the act on income tax. Consequently, the calculation rules on capital gains laid down in § 46, subsection 1 must be applied.

Reference is made to: Central Tax Board’s advance ruling, effective from 1 January 2017 to 31 December 2017.

Reference is made to: § 32, § 45, subsection 1, § 46, subsection 1, and § 53, subsection 8, act on income tax

The Supreme Administrative Court ruling means that in circumstances where the act on income tax should be applied on the assessment of the taxpayer’s income taxes, various transfers of virtual-currency positions fall under the scope of application of all the tax rules found in the said act regarding capital gains. Precise instructions on how those rules are applied are given below in this guidance. In the case of a capital loss, deductions can be made (as provided in § 50, subsection 1). In the case of a small capital gain, exemption from capital gains tax is granted (as provided in § 48, subsection 6).

On 6 July 2018, the Administrative Court of Helsinki gave a ruling (Helsingin HAO 18/0426/3, Finlex) on the tax treatment of an exchange transaction of virtual currencies. According to the ruling, when one virtual currency is exchanged for another, it must be treated as an event where a capital gain materialises. The Supreme Administrative Court refrained from giving leave for appeal against the Administrative Court ruling. As a result, the ruling gained legal force. Because the exchange transactions with virtual currencies are exchanges of assets for other assets within the meaning of the act on income tax, the tax rules that control the taxation of capital gains, found in the act on income tax, must be applied on the income arising from them.

Whereas under the Supreme Administrative Court ruling no 2019:42, virtual-currency units held by a taxpayer must be treated as assets (under § 45, subsection 1 of the act on income tax), they are still not to be treated as securities. In addition, for tax purposes, virtual currencies are not equated to legally established currencies or to other means of payment. In practice, there are no restrictions on the use of virtual currency, and to use it is a matter of freedom of contract between the parties involved.

Due to the fact that a taxpayer’s holding of virtual-currency units is regarded as an asset, and not regarded as a means of payment, any circumstances where the taxpayer spends or uses the units is an event that triggers the assessment of taxes. Every increase or decrease in the value of a virtual-currency position is taxable separately, such as when

1. Virtual currency is traded for any legally established currency. Whether the money remains in an account administered by a third party such a broker, or is transferred to the taxpayer’s bank account, is not important.
2. Virtual currency is spent by paying it to another party in return for goods or services.
3. Virtual currency is exchanged for another virtual currency.

For tax purposes, every instance of spending, using, realising, selling or trading virtual currency that triggers tax liability is treated as a separate transaction. Every transaction where units of virtual currency are used in some way causes the taxpayer’s position, for purposes of taxation, to increase or decrease in value. If the virtual-currency units that were spent had been acquired through multiple transactions, the increase or decrease in value that had resulted from each transaction must be calculated separately. When calculating the changes in value, virtual currency is deemed to have been spent in the same order as it was acquired unless the taxpayer proves otherwise.

In addition, virtual currency networks also allow taxpayers to 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 2.5 and 3.2 below.

The income tax that a taxpayer must pay due to operations with virtual currency is always calculated in euros and according to the circumstances as explained in more detail below.

In the Finnish tax system, taxable income is calculated by source. There are three categories of sources of income: business, agriculture and other activities. Business income is taxed as provided in the act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968 (EVL)), agricultural income according to the agricultural income tax act (Maatilatalouden tuloverolaki 543/1967 (EVL)) and other income (from what is known as a “personal income source”) according to the act on income tax (TVL). With the exception of certain corporate entities, the application of the tax rules in the above acts depends on the nature of taxpayers’ operation, regardless of whether the taxpayer is a legal person (such as a limited-liability company) or an individual taxpayer (a natural person).

Many corporate entities have no “personal source of income” that would be taxed in accordance with the act on income tax (TVL). All their profits are assessed as provided in the act on the taxation of business income (EVL) unless part of the profits are derived from agriculture (§ 1, subsection 2 of the act on the taxation of business income). These corporate entities include, on the condition that their activities are not (nonprofit) promoting the public good, limited-liability companies (Oy), cooperative societies, associations, and foundations. This way, if the corporate entity is among those that have no personal source of income, its income from operations in virtual currency is part of the business source of income; the only exception being an activity deemed as taxable in accordance with the act on the taxation of agricultural income (MVL). For more information on how the act on the taxation of business income will affect the tax assessment of profits, see section 2 of the “guidance on source-of-income rules for dividing income taxes of certain corporate entities” – Eräiden yhteisöjen tulolähdejaon poistaminen (in Finnish and Swedish).

In general, virtual currencies can be deemed to originate from any of the three income sources depending on their nature and intended purpose if the corporate entity is still treated as having a personal, business, and agricultural source of income. The source of income relating to the received virtual currency affects its tax treatment. In particular, the source has an impact on the deductibility of any losses.

Although the choice of the applicable law is not dependent on the legal form of the taxpayer receiving the income, the act on income tax (TVL) is usually applied if the taxpayer is an individual. For guidance on drawing the line between business, personal or agricultural sources, see the “Individuals’ income tax treatment of operation of a business, pursuit of an income-generating activity, pursuit of a recreational activity, hobby” – Yritystoiminta, tulonhankkimistoiminta ja harrastustoiminta henkilöverotuksessa (in Finnish and Swedish).

Business enterprises are taxed in accordance with the act on the taxation of business income on the condition that their activity coincides with the legal definition of business, unless the enterprise is still treated as having a personal, business, and agricultural source of income as discussed above. Any operations of the enterprise that are outside of the legal definition of business and cannot be deemed to be agricultural operations as referred to in the agricultural income tax act are considered related to “other sources of income” and taxed under the act on income tax (TVL).

2 Virtual currency in the assessment of individual income taxes

2.1 Taxation of virtual currencies when taxation is governed by the act on income tax

Under § 29 of the act on income tax, taxable income comprises any income earned by a taxpayer in the form of money or benefits. All income earned in the form of money or benefits is taxable unless it is expressly provided in the tax rules to be tax-exempt.

Under § 32 of the act on income tax, taxable income from capital includes any profit made on an asset, or the selling of an asset, as well as any other income that can accumulate as a result of an asset.

Under § 110 of the act on income tax, 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. Capital gains resulting from the selling of assets must be attributed to the tax year when the sales contract was executed, the exchange deal was completed or other transaction or transfer occurred.

Under § 45 of the act on income tax, capital gains are treated as income from capital, subject to taxes as provided “in this Chapter of this legal act”. In § 46, subsection 1 of the said act, it is further laid down that the calculation rule for arriving at the capital-gains amount is to subtract the acquisition cost (or its remaining, not yet depreciated residual value) and also to subtract the selling expenses from the total price received from the buyer of the asset. However, for taxpayers other than corporate entities and partnerships, the sum to be subtracted from the total price is at least 20 percent; and if the taxpayer had held the asset for at least 10 years, the sum to be subtracted from the total price is at least 40 percent.

Pursuant to the provision in § 50, subsection 1 of the act on income tax, a capital loss that results from a selling transaction as described above can be deducted from the taxpayer’s capital gains from other selling of assets during the same tax year and during five subsequent years. If a taxpayer who is an individual or an estate of a deceased individual has a remaining tax-deductible amount of capital losses after all the taxpayer’s capital gains have been accounted for, such a remaining amount can be deducted from their other taxable income from capital. If this deduction is made, it must be made prior to carrying out the taxpayer’s other deductions from that income. Any capital losses that remain are not included in the taxpayer’s calculation of a loss for the capital-income category.

For income tax purposes, every instance of selling or exchanging that gives rise to income taxation is seen as a separate transaction. When applied on the tax assessment of virtual currencies, the above means that every transaction where a virtual-currency position goes to another owner against payment is a transaction for which a capital-gains calculation must be performed. This corresponds to the principle of how the selling of corporate shares is accounted for, i.e. transaction-by-transaction.  Capital gains are subjected to specific, separate calculations in order to treat every instance of receiving an asset (or assets) in an isolated way.

Under the provision in § 48, subsection 6, the act on income tax, if an individual or an estate of a deceased individual has sold assets and received a capital gain, it is not taxable income if the total selling prices of the assets sold during the tax year do not exceed €1,000. When the above legal provision is applied, the total per year should not include any transfers or sales that elsewhere in the said act have been defined as tax-exempt selling of assets (if a capital gain is received), and it should not include usual household goods and furniture.

When tax assessment is carried out for taxpayers whose income or assets include virtual currencies, the provision in § 48, subsection 6 of the act on income tax is also applicable, i.e. it can apply on the capital gains that do not exceed the threshold above.   Correspondingly, the selling prices of virtual-currency positions must also be included in the sum total of the capital gains per year when the tax authorities determine whether the 1,000-euro threshold is reached.

If a virtual currency diminishes in value, it does not constitute a deductible loss for the taxpayer under the definition of § 50, subsection 3 of the act on income tax (TVL) because the taxpayer’s holdings of virtual currency are assets within the meaning of § 50, subsection 1, and they are not a share or a security.   

2.2 Trading between legal tender and virtual currency

As noted above, any situation where taxpayers spend, realise, use or exercise their virtual-currency units is an event that causes a tax calculation to be made in order to determine the capital-gain or capital-loss amount. When calculating the changes in value, virtual currency is deemed to have been spent in the same order as it was acquired unless the taxpayer proves otherwise. To keep track on the order of a taxpayer’s spending of their virtual-currency units, the virtual accounts set up by the service platform can be relied on, but evidence of this must be presented to the tax authorities upon request.

The increased value of the virtual currencies that gets realised when selling takes place falls into the category of taxable capital gains. The calculation is performed in such a way that the result is beneficial for the taxpayer: Either the actual acquisition cost (plus selling expenses) is subtracted, or a “deemed acquisition cost” is subtracted (the latter alternative does not allow any selling expenses to be included). The calculation that involves the “deemed acquisition cost” subtracts 20% of the selling price if the holding time of the assets was less than 10 years, and 40% if the holding time was at least 10 years.

In cases where the act on income tax is applied on the taxpayer’s taxation, and a position in virtual currencies had been transferred away against consideration (=sold) and this resulted in a loss, the rights of the taxpayer to deduct that loss are determined in accordance to the tax rules on capital losses.

2.3 Spending virtual currency on purchases of goods and 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 an exchange transaction based on a mutual agreement. As noted above, this is a situation where taxpayers use their units of virtual currency, and it causes a tax calculation to be made in order to determine the exact capital-gain or capital-loss amount.

2.4 Exchanges of virtual currency for another virtual currency 

In reference to the reasoning given previously in this guidance, it is a taxable transaction if positions in different virtual currencies are exchanged against one another: there is either a taxable capital gain or a tax-deductible capital loss.

When the taxpayer is not one who must maintain an accounting system, and the act on income tax is applied on the taxpayer’s taxes, exchange transactions in virtual currencies take place at market values. The market value is the quoted value of the virtual currency in euros at the time of the transaction. 

If it is not possible to determine a reliable euro value for neither of the two virtual currencies being exchanged in an exchange transaction, it is necessary to deem the transaction to have been based on original acquisition costs. 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. Consequently, in these circumstances, the transaction gives rise to no taxable gains or tax-deductible losses. Taxable gains or deductible losses only materialise when either of the parties to the transaction spends the virtual currency that was received.

Taxpayers who have a legal obligation to maintain an accounting system must observe the principles of valuation when they have traded in virtual currency (for more information, see section 3).

2.5 Taxation of virtual-currency mining gains 

2.5.1 The “proof-of-work” protocol

The virtual currency system can generate new currency units in a process controlled by a complex algorithm. This is known as mining, and it allows members of virtual currency networks to acquire new units by making the processing power of their computer available to others. These members of the network are given new units generated by the algorithm as a reward for validating the transactions that take place. In practice, new virtual currencies are distributed between the members of the network at random (when the mining is based on the 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 this kind of activity does not constitute income from investment, assets, or capital, as referred to in the act on income tax. Under the provision of § 61 of the act on income tax (TVL), any income other than capital income falls into the category of earned income. Income from mining is treated as earned income. 

The point in time when income from mining is realised as income in the miner’s hands (in reference to § 110, act on income tax) when he or she gains possession of the income, i.e. when the virtual currency or fee is deposited into an account or virtual wallet or is otherwise made available to him or her. Each time the income is realised is valued separately. Consequently, whenever income is generated from mining, it must be valued.

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 quotes made public by any known virtual-currency exchange. Taxpayers need to choose one such exchange, and keep to the valuations and quotes listed by that exchange.

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

2.5.2 The “proof-of-stake” protocol

The accumulation of new virtual currencies can also be based on the blocking of existing virtual currencies for a time, in order to protect the virtual currency in question. The reward for this may be an increase of 5% per annum (or other comparable percentage) on top of a miner’s existing virtual-currency balance, paid on a daily basis (the proof-of-stake protocol). From the perspective of taxation, this is a direct gain on a previously held asset, and consequently, it is regarded as a capital gain.

The point in time when income is realized for purposes of taxation is when the miner gains possession of the new units of virtual currency. The income is valued at the market value of the virtual currency at that time. The amount of income received is also the gross acquisition cost for the newly acquired 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 a gain on previously owned virtual currency. 

2.5.3 Deducting the expenses

The direct expenses for the production of income can be deducted from the income. Mining (in accordance with the proof-of-work protocol) is an energy-intensive activity, and the expenses relating to electric power may be high. For tax purposes, miners need to be able to specify how much of their consumption of electric power is due to the use of a computer or other device performing the mining i.e. producing the income. Other consumption relating to the miner’s computer is not tax-deductible.

Evidence of the household’s consumption of electric power must be presented upon request. Miners need to be able to verify the portion of their consumption that is attributable to mining as well as the household’s usual consumption of electricity. For example, they can have an electricity meter for the device used for mining. Any portion of the 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. If the taxpayer cannot provide reliable proof, the consumption of electricity can be estimated.

The acquisition cost of any equipment for mining can also be deducted. However, the miner must have evidence of the purposes for which the equipment is used and how frequently. Any use of computer equipment for personal purposes and the number of computers in the household are important as well. The Tax Administration will still grant the deduction although the taxpayer would use such a computer for personal purposes from time to time (for private online banking, etc.).

If a computer or another device is used for earning an income from mining, acceptable deductions from its acquisition cost are based on the following percentages:

25%	taxpayer-provided evidence of occasional use for earning an income from mining
50%	evidence of regular use for earning an income from mining
100%	evidence to prove that the computer’s primary purpose is for earning income from mining

If the useful life of the device is more than three years, its acquisition cost must be deducted as a series of depreciation expenses over the years of its life. Up to 25% of the residual acquisition cost can be depreciated every year. Any devices worth €1,000 or less can usually be expected to have a useful life of no more than three years, in which case the entire acquisition cost can be booked as an expense.  Any portion of the use of the device for purposes other than the production of income are not deductible.

Any expenses that the taxpayer’s mining operation causes are related to the miner’s earnings – for this reason, the deduction must be properly attributed to the miner’s taxable income from mining. From this, it follows that mining expenses cannot be deducted at a later date: they cannot be deducted at the stage when an increase in value is realised and subject to taxation as a capital gain.

2.6 Notes on special circumstances relating to virtual currencies

2.6.1 Acquisition cost of virtual currency in the event that a blockchain is split

Sometimes the blockchains of virtual currencies have become forked. In these circumstances, any owners of the original virtual currency are given new virtual currency that have a different denomination, which corresponds to their original holding or a percentage thereof, for free, without losing any of their original virtual currency, and without having changed or divided the value of the original virtual currency. Such an operation does not involve a distribution of actual assets or existing virtual-currency positions across various other virtual currencies. Instead, this is a process that generates an addition to the owner’s existing 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 €0.00. In situations like the above, if the taxpayer uses or exercises their new position (when taxes are assessed as provided in the act on income tax, i.e. the taxpayer is an individual or an estate of a deceased person), the tax calculation must be based on a deemed acquisition cost of the position.

2.6.2 Distributing dividends in virtual currency from unlisted companies 

Instead of paying out dividends in a legally established currency, businesses may choose to pay them in the form of company shares, or in the form of virtual currency. If virtual currency is the method of payment, the value of the dividends that a shareholder gets is deemed to equal the market value of the virtual currency on the day when the dividends were first available for withdrawal. From the perspective of taxation, the acquisition cost of any virtual-currency position that was received as dividends – in the same way as when shareholders receive company shares as dividends – is their market value on the day when the dividends were first available. In other respects, the principles applicable to normal dividends also apply to the taxation of dividends paid to shareholders in virtual currency.

2.6.3 ICO (initial coin offering)

ICO is a means for companies involved in a blockchain to sell their own pre-mined 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 subject to capital gains tax.

The terms and conditions of ICOs may vary. For this reason, investors’ tax liability is determined on the basis of the true nature of their investment, taking account of the special considerations concerning the taxation of virtual currencies. If the taxpayer-investor pays for their ICO investment by giving away some of their existing virtual-currency units, it triggers a capital-gains calculation as usual, resulting either in a taxable gain or in a deductible loss.

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 determined by tax authorities for inheritance and gift tax purposes. If the gift recipient were to use the virtual currency and cause a realisation of an increase or decrease in value, all the tax rules on capital gains are applicable, including the special provisions in § 47 of the act on income tax governing the calculation rules of gains. Under § 47, subsection 1, in cases where no consideration had been paid by the taxpayer receiving the assets, the value determined for inheritance and gift tax purposes must be applied as the assets’ acquisition cost. However, the correct way to calculate the acquisition cost is to look into the cost that the donor had paid, if the gift recipient transfers the gifted assets away before one year has elapsed after the date of the gift.

If the position in virtual currency that later has been sold or transferred had been received in a distribution of matrimonial assets, holding time and acquisition cost are calculated based on the acquisition that took place before the distribution, as provided in § 46, subsection 2 of the act on income tax. In other words, the calculation must revert to the original price paid on the original date of acquisition.

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. However, this guidance does not address the tax consequences of taxpayers’ focused competitive gaming, e-sports, related fees, rewards and the like.

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 a legally established currency or to 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 legally established currency, virtual currency or other benefits.

In accordance with the provision in § 110, the act on income tax, income is deemed to have been earned during the tax year when was withdrawn, deposited into the taxpayer’s bank account or otherwise made available to the taxpayer. In this guidance, these kinds of games and any virtual currency associated with the games are considered one and the same. From this, it follows that any income from the games is only considered to have been earned, in reference to § 110 of the act on income tax, when the player cashes out from the game. Liability for tax 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, a legally established currency, or other assets.

Earnings from online games are based on players’ personal activity and therefore taxed as income. Whether a player uses a legally established currency to play the game is irrelevant. Income from online games is valued and taxed according to the fair market value of the asset received in return for the game’s internal currency when the player cashes out from the game. Players can only deduct, as an expense for the production of income, the portion of their investment on which their earnings are based and must be able to provide documentation.

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 are treated as losses from recreational activities; for purposes of taxation, they are considered living expenses. Under the provision of § 31, subsection 4 of the act on income tax, living expenses are not tax-deductible.

2.8  Reporting the receipts of income when completing the tax return for individual taxpayers

When a position in virtual currency is used, regardless of the nature of the situation, it triggers a capital-gains calculation, resulting either in a taxable gain or in a deductible loss because the value has changed. Finnish resident taxpayers having received income based on positions of virtual currency of any kind must complete their income tax return on their own initiative and include that income in it when submitting the return to the Tax Administration.

Taxpayers must report their income, whether it has come from a source in Finland or from a source outside of Finland. Whether income is earned in euros, other legally established currency or in another form of an increase in value is also irrelevant. The taxpayer must report the received income no later than on the tax return for the year when the actual receipt of the income took place. Already when the tax year is still ongoing, taxpayers can request a prepayment calculation to be set up for them. The prepayments of income tax would then reflect their increase in income resulting from virtual-currency transactions. Prepayments can be set up when the taxpayer has submitted a request via the usual e-File services of the Tax Administration.

Because a taxpayer’s holding of a position in virtual currencies is not seen as a holding of securities, the capital gains and losses associated with virtual currencies must be reported in MyTax or on Form 9, “Capital gains and capital losses”. No specific form for the gains and losses from virtual currencies is available. Taxpayers must submit complete reports for every transaction resulting in receipt of taxable gains, regardless of whether MyTax or paper forms are employed when reporting.

On the other hand, any income from mining (substantiated by “proof of work” protocols) must be entered into the taxpayer’s income tax return under “other earned income”. Expenses for the taxpayer’s mining activities are “expenses from the production of income”. If for tax purposes, the mining is an operation that generates capital income (“proof of stake” protocols), the taxpayer must instead enter it as “other capital income” and any deductions must be attributed to other capital income as well.

Taxpayers who do not have to maintain an accounting system must keep records on their activities with virtual currencies, providing sufficient detail for taxation purposes. Taxpayers who deal in virtual currency must keep records, even if the value of their virtual-currency positions is low or even if they have very few transactions. Keeping records is required of taxpayers, so that their legally defined responsibility to submit reports on their income can be fulfilled. Pursuant to § 7 of the act on assessment procedure, taxpayers have the obligation to report their taxable income in their tax return. Under § 11 of the act on assessment procedure, taxpayers need to be able to present evidence of their income as well as documentation, such as receipts. The Finnish Tax Administration has issued a decision on taxpayers’ responsibility to keep records.

If the taxpayer is unable to account for their income and expenses, the tax authority may carry out his or her tax assessment as provided in § 27 of the act on assessment procedure, based on estimated earnings and expenses. For this reason, from the perspective of taxpayers’ own legal rights, it is important for the taxpayer to keep detailed records of any transactions with virtual currency and to save the related documentation. It is permissible to record the transactions in a separate worksheet by computer. The Tax Administration can request to see taxpayers’ notes, records and documentation.

As provided in § 12 of the act on assessment procedure, taxpayers’ records must be based on documentation such as receipts, and kept available for six years from the beginning of the year following the end of each tax year.

3 Taxation of the virtual-currency operations of business taxpayers

Virtual currency can enter into a company’s business activity in many ways. For example, it may be that the business, or a part thereof, is based on mining, or on 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.

All realised increases in the value of virtual currencies constitute taxable income, regardless of the income source. Correspondingly, any expenses caused by the activities to produce the income and to manage it are tax-deductible. When the company enters into an exchange transaction with its virtual-currency positions, the tax calculation allows the company to deduct the acquisition cost, regardless of the source of income.

The tax deductions that are due to losses in value and other losses can only be accounted for within the business source of income (for information on the tax assessment based on the act on income tax (TVL), see section 2 of this guidance). When the operation is related to the taxpayer’s business source of income, the tax-deductibility of loss in value and other losses is affected by the taxpayer’s accounting, namely the category of assets. For all taxpayers whose taxation is based on the act on the taxation of business income (EVL), property and assets are categorised as financial assets, current assets, investment assets or fixed assets. In accordance with the provisions of § 1, subsection 2 of the act on the taxation of business income, positions in virtual currency may also be categorised as “other” assets within the meaning of § 12a of the act. This rule concerns the corporate entities that no longer are treated as having separate sources of income.

Because virtual currency is not legal tender, provisions on exchange rate fluctuations – § 5.12 and § 18.3 of the act on the taxation of business income – do not apply.

3.1 Buying and selling virtual currencies

A company’s business can be based entirely or partially on trading in virtual currency. In this case, its income consists of the gains from the selling. In this guidance, ‘trading in virtual currencies’ refers to the buying and selling so that a legally established currency is converted into virtual currency and vice versa, and it can additionally refer to exchange transactions between two virtual currencies. 

If the investment operation of a company is based on virtual currencies, it is treated as a business activity for tax purposes, within the meaning of § 1, subsection 1 of the act on the taxation of business income if the operation is continuous, systematic and actively ongoing, it carries a financial risk and is aimed for 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 other business. For tax purposes, this activity is also a part of the company’s business operation.

If trading in virtual currencies satisfies the definition of business activity, the amount of virtual currencies held by such a company is considered to constitute current assets. Any increase in such virtual currency, included in the company’s current assets, constitutes taxable income (under § 5(1), act on the taxation of business income), and any decrease can be deducted directly from current earnings (under § 8(1), act on the taxation of business income).

In addition, some companies can invest their business assets in virtual currency on a temporary basis. In this case, the virtual currency held by such a company is considered part of its financial assets. If a position in virtual currency is part of financial assets and its value has gone up and this increase has been realised, it is taxable income for the corporate entity (§ 5.5 of the act on the taxation of business income). If its value has decreased and the decrease has been realised, it is deductible from the corporate entity’s income (§ 8.1 of the act, and §17, subsection 5, line 2 of the act). 

If the commercial operation with positions of virtual currency does not coincide with the definition of “business activity”, the tax authorities assess taxes on it in accordance with the act on income tax (TVL), unless the taxpayer continues to have separate personal, business, and agricultural sources of income. For more information, see section 2 above in this guide. However, the relief from capital-gains tax for small amounts within the meaning of § 48, subsection 6 of the act on income tax, is not available when taxes are assessed for a business taxpayer. In the same way, the deemed acquisition cost, within the meaning of § 46, subsection 1 of the act on income tax cannot be applied on calculations that involve a business taxpayer.

If the taxpayer entity no longer has the separate sources of income as discussed above, the taxpayer’s income from commercial operations with virtual currency is taxes in accordance with the act on the taxation of business income, although the taxpayer’s activity does not coincide with the definition of “business activity” in § 1, subsection 1 of the act. If the activity lacks the characteristics of business activity, positions in virtual currency are generally seen as part of the taxpayer’s “other” assets unless the positions can be categorised as current assets, financial assets, investment assets, etc. under the provisions of the act on the taxation of business income (EVL). If a position in virtual currency is part of “other” assets and its value has gone up and this increase has been realised, it is taxable income for the corporate entity (§ 5.1 of the act on the taxation of business income). If its value has decreased and the decrease has been realised, it is deductible from the corporate entity’s income (§ 8.1 of the act, and §17, subsection 1, line 2 of the act).

3.2 Business enterprises as miners

In the same way as private individuals, also businesses can engage in mining, as referred to in section 2.4 above, and be rewarded in virtual currency.

Any virtual currency received as a reward for mining is deemed, under § 19 of the act on the taxation of business income, to have been earned during the tax year when the virtual currency was cashed out as money, as a receivable or as other benefits of monetary value. This way, any received virtual currency relation from a mining activity is treated as income for the tax year when it is cashed out. However, if the reward for mining is based 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 treated as growing in a linear accumulation process over that period. As a result, it is treated as taxable income relating to that period.

The asset category of virtual currencies received as a reward for mining depends not only on the method of mining but also on the characteristics of the pursued mining activity. As a result, the Tax Administration decides on each case separately when ascertaining the income-source category and asset category of a taxpayer’s virtual-currency position. 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 carried out 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 receives from the sale (relating to its business source of income) of goods or services is regarded as part of the company’s financial assets. If the sale of goods or services is related to an activity taxed according to the act on income tax, any virtual currency earned from the same is also deemed to be related to the personal source.

If the company were to exchange its virtual-currency units for legally established currency or if it were to spend them on purchases of goods or services, it treated as an exchange transaction based on a contract. The transaction triggers the liability to pay tax on any change that has occurred in the value of the virtual currency. The exchange transaction may cause that the company either makes a profit or suffers a loss. Tax treatment depends on the virtual currency’s source of income and asset category.

Any profit generated from trading virtual currency booked as financial assets or “other” assets constitutes taxable income (§ 5.1 and § 5.5, act on the taxation of business income), and losses can be deducted directly from current earnings (§ 8.1 and § 17, subsection 1, line 2 of the act). 

Any increase in the value of virtual currency relating to the personal source of income is taxable income for the company as well, pursuant to the provisions of § 45, act on income tax. If the value decreases, it results in a loss, within the meaning of § 50, act on income tax, that the company can deduct from any capital gains it may receive during the tax year and five subsequent years, on the condition that these gains relate to the company’s personal source of income.

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 a position’s acquisition cost

For tax purposes, it is required that acquisition costs of assets be accounted for in euros. From this follows that any virtual currency held by a business enterprise must also 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). The Accounting Board’s opinion is based on the principle that when an enterprise accepts crypto currency, the value is converted to Finnish currency, the euro, at the rate in force on the day of the transaction.  This is done for the purpose of accounting. If a rate in force on the day of the transaction exists, it must be entered in the books. If it does not exist, a value agreed between the parties is entered in the books.

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

When selling or exchanging a position in a virtual currency, its acquisition cost must be determined. This is affected by the source of income relating to the position, and if the source of income is the business source of income, the acquisition cost is also affected by the asset category in which the virtual currency had been entered in business accounting. As it has been explained above, when positions of virtual currency are part of the business source of income, the asset category is usually either current assets or financial assets. Positions in virtual currency may also be categorised as “other” assets. This rule concerns the corporate entities that no longer are treated as having separate sources of income.

Current assets

Pursuant to § 14(2) of the act on the taxation of business income, the acquisition cost of current assets is determined on the basis of the FIFO principle unless the business taxpayer is able to prove otherwise. In other words, the valuation can either be based on the asset’s actual acquisition cost or on FIFO. This means that for tax purposes, the acquisition cost of current assets cannot be determined on the basis of the LIFO principle, for example.  (For more information, see the Supreme Administrative Court’s rulings from 1999 (record No 2208) and 2006 (No 2469).)

If the conditions laid down in § 28 of the act on the taxation of business income are satisfied, taxpayers can make a write-off entry in their accounting in order to lower the acquisition-cost value of virtual currency booked among current assets.

Financial assets, other assets, and assets taxable under the act on income tax (TVL)

There are no separate regulations for determining the acquisition cost of financial assets and other assets. From this, it follows that their acquisition cost is determined on a case-by-case basis, attaching importance to actual costs. In the same way, if a position of virtual currency is part of a taxpayer’s personal source of income, its acquisition cost is also determined on a case-by-case basis and based on actual costs.

4 Virtual currency in value-added taxation

4.1 The treatment of 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 § 1 of the VAT Act (1501/1993). Pursuant to § 1, 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 VAT is payable on the sale of financial services (§ 41, VAT Act). The concept of ‘financial services’ is defined in § 42:

Financial services include

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

Pursuant to Art. 135(1)(d) of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT (“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 Art 135(1)(e), 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 that are not normally used as legal tender or coins of numismatic interest.

Payment transactions

Services associated with electronic transfers of funds fall into the category of ‘financial services’ under the provisions of § 42, subsection 1.4. Tax-free operations include the services consisting of the transfer of funds, the management of means of payment, and the issuance of means of payment. These include bank transfers. Examples of means of payment include credit cards traveller’s cheques.

Currency exchange

The service of foreign-currency exchange is also a financial service (§ 42, subsection 1.5, VAT Act). Currency exchange is a service that can be carried out VAT-free, whether on the taxpayer’s own account or on account of a client. In addition to the selling and brokering operations with currency, it has been deemed that the VAT exemption extends itself to any services offered by businesses whose clients – usually banks – have commercial operations with currency, and forward contracts involving currency, 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 VAT treatment of Bitcoins in its case law.

In Case C‑264/14 (Hedqvist), Mr Hedqvist wanted to provide services consisting of the exchange of traditional currency for the Bitcoin virtual currency and vice versa. This service was offered to clients by Mr Hedqvist’s company. The CJEU found that Mr Hedqvist’s operation, consisting of exchanging legally established currency for Bitcoins, and vice versa, constituted the supply of services for consideration within the meaning of the VAT Directive, because the key element was exchanges between different means of payment and because there was a direct link between the services supplied and the consideration received by Mr Hedqvist.

According to the CJEU, these transactions were exempt, pursuant to Art 135(1)(e) of the VAT Directive. The CJEU ruled that transactions to exchange Bitcoins 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 therefore VAT exempt.

4.3 National case law            

The Central Tax Board found in its decision No 2014/34 (legally binding) that, for VAT purposes, Bitcoins constitute a means of payment. The case involved a company that operated a technical platform (marketplace) for selling and buying Bitcoins. The platform worked in such a way 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 into legally established currency, or vice versa, constitute commissions charged for financial services within the meaning of §42, the VAT Act. Consequently, the fees are exempted from VAT.

Central Tax Board’s decision No 2014/34

X Ltd provided a technical platform for buying and selling the Bitcoin virtual currency. The Bitcoins were traded for legally established currency. X Ltd charged commissions from the buyers and sellers, which was a percentage of the sale and purchase prices of the Bitcoins. From the perspective of VAT, Bitcoins constitute a means of payment. Consequently, the commissions charged by X Ltd constituted remuneration for financial services missions charged for financial services within the meaning of §42, the VAT Act and the kinds of transactions referred to in Art 135(1)(d) of the VAT Directive (2006/112/EC). X Ltd did not have to pay VAT on the commissions. This is an advance ruling, effective from 20 August 2014 until 31 December 2015.

§ 41, § 42(1)(4) and §42(1)(5), VAT Act

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

Legally binding

5 Entry into force, and notes on how to apply this guidance

This guide is in effect as of 1 January 2020.  However, on demand by a taxpayer, and concerning the way the tax rules on capital gains and losses should be applied, the tax authority may apply its guidelines retroactively, within the statutory time limits that concern the lodging of appeals against tax decisions. Reference is made to the Supreme Administrative Court’s ruling no 2019:42.

However, the Finnish Tax Administration as a public authority does not have jurisdiction over a case where the taxpayer has already received a decision, pertaining to the same tax year and claim, from the Board of Adjustment or from another authority that deals with appeals.  If a taxpayer should seek appeal and the above circumstances apply, the taxpayer must follow the instructions that had been enclosed with the decision letter and make the appeal within the time limits that have been set out.

For more information on how to make an appeal, see Claim for an adjustment of income tax.