The Danish Tax Council has ruled that lock-up and release of cryptocurrencies on the Nexo.io service does not constitute a realization. The decision is important for Danes who invest in cryptocurrency and use both centralized and decentralized services that offer lock-up of cryptocurrency in exchange for "earn rewards" such as Aave and Summer.fi. Furthermore, it provides an important contribution to the interpretation of the concept of realization.
The decision was made on the basis of a request for a binding answer where a taxpayer wanted clarification on the tax treatment of "locking" deposits on Nexo.io in order to obtain a return. Nexo.io is a platform where you can "lock" your cryptocurrencies in exchange for a return, so-called "earn rewards". The central question of the decision was whether it should be considered a realization under section 5 of the State Tax Act to "lock" cryptocurrency in order to obtain a return. For more general information on taxation of cryptocurrencies, please refer to our ultimate guide to bitcoin and tax.
The case primarily concerns the legal interpretation of "realization" under the Danish State Tax Act and more specifically, whether a "locking" of cryptocurrency should result in the locked cryptocurrency being considered realized. Initially, the Tax Council assessed how a deposit of cryptocurrency on the Nexo.io platform could be considered a monetary claim under section 1 of the Capital Gains Act. A monetary claim is defined as a claim that gives the creditor a legal claim for payment of a certain amount of money. In other words, an obligation that the debtor can only be released from by paying money. Gains or losses on such claims are usually taxed as interest or capital gains.
However, the Tax Council assessed that since the deposits were in the form of cryptocurrencies, they should be considered a capital asset rather than a monetary claim for tax purposes. This meant that they were not covered by the Capital Gains Act, but instead subject to the realization principle in the State Tax Act.
The realization principle implies that any income or loss only affects taxable income upon realization, i.e. when the asset has been sold. The next legal question is thus whether the locking of cryptocurrency on Nexo.io should be considered a realization. It is the opinion of the Danish Tax Council that realization should be understood as a transfer, redemption or similar forms of transfer of rights. The Tax Council also finds that changes in the contractual basis for an asset may cause the asset to be considered fully or partially realized, cf. SKM2023.306.SR.
The Tax Council determined that the ownership of the "locked" cryptocurrencies was retained. In this connection, the Tax Council emphasized that during the agreement period, the questioner could neither withdraw the "locked" cryptocurrencies nor terminate the agreement with Nexo.io. The fact that the questioner retained ownership was decisive in the Tax Council's assessment that the locking did not result in realization under section 5 of the Danish State Tax Act.
The Tax Council also attached importance to the fact that there was no transfer of rights during this "locking" and that the deposited cryptocurrencies did not change character in the process.
The Tax Council thus concluded that "locking" on Nexo.io did not entail a realization. The Tax Council further noted that a release of the locked cryptocurrencies should also not be considered a realization and is therefore neither taxable nor deductible.
It has long been common knowledge that a lock-in such as the one in question does not result in a so-called tax relevant event abroad. Especially in the US, this view has been widespread and used in various contexts for tax optimization.
With this decision, the Danish Tax Council has confirmed that a similar viewpoint applies under Danish law, where it has long been considered that a realization of cryptocurrency occurs when an exchange takes place. As there is no exchange in this case, and as the ownership of the deposited cryptocurrencies is retained, the Tax Council confirms that there is no realization when you lock your cryptocurrencies on central platforms.
This case concerns Nexo.io, but it is our assessment that the Tax Council's reasoning on this point is generally formulated and therefore extends beyond Nexo.io. We therefore assess that the Tax Council's decision applies to other similar platforms, including decentralized financial services ("DeFi") such as Summer.fi and Aave.
The Tax Council's decision can be read here.
As Denmark's only specialist office within cryptocurrency, Samar Law has extensive experience in advising on cryptocurrency taxation matters. Have you received a letter from the Danish Tax Agency and are unsure what to do? Then we encourage you to contact lawyer Payam Samarghandi at payam@samarlaw.dk or mobile 60793777 for a non-binding conversation.
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