There is good news for those who have been taxed on "undocumented deposits" or on the basis of a daily price of cryptocurrency. In two responses to the Tax Committee, the Minister of Taxation has acknowledged that there is an incorrect practice and a change in practice, respectively. These circumstances now lead to a control signal that will give the affected citizens access to an extraordinary reopening of their cases at the Danish Tax Agency.
On February 20, 2024, the Minister of Taxation has answered two questions to the Tax Committee regarding the Danish Tax Agency's practice regarding the calculation of gains and losses on cryptocurrency. In the answers, the Minister of Taxation acknowledges that there has been a change in practice in the Tax Agency's calculation of gains and losses. In this news item, we explain what the answers mean in concrete terms and how to proceed if you want to have your case reopened. This news item will also be updated as soon as the Ministry of Taxation shares the relevant control signal.
If you exchange cryptocurrency to or from fiat currencies such as DKK or EUR, it's simple to calculate the value of the cryptocurrency bought or sold. However, the question is how to calculate the value of cryptocurrency in so-called 'cross trades', i.e. exchanges between cryptocurrencies.
Until the fall of 2022, the Danish Tax Agency used one daily rate per cryptocurrency. In other words, the Danish Tax Agency did not take into account in its calculation that the value of a cryptocurrency could change during the course of a day. If you had acquired a cryptocurrency at a price that was higher than the daily rate used by the Danish Tax Agency for that day, you would be taxed on a non-real profit and vice versa if you had acquired a cryptocurrency at a price that was lower than the daily rate.
This practice was changed in the fall of 2022, when one daily rate per cryptocurrency was no longer used, but the actual rate was used. According to the Ombudsman's practice, such changes in practice must be published and it must be possible to have your case reopened according to the new practice.
It is this change in practice that the tax minister now acknowledges should have been published. The tax minister also writes that after the guideline, it will be possible to have your case reopened.
The acquisition price for undocumented deposits was calculated at DKK 0 until the fall of 2022. Undocumented deposits should be understood as undocumented acquisitions of cryptocurrency where the citizen has not documented the time of acquisition, the method of acquisition or the acquisition price. In practice, undocumented deposits occur frequently. For example, when trading between private individuals or when a person transfers cryptocurrency from one trading platform to another without being able to document that they were the owner of the cryptocurrencies on the first trading platform.
However, in the fall of 2022, the Danish Tax Agency introduced a new method for undocumented deposits and thus changed their practice. The Tax Agency could now obtain information that made it possible to calculate the exchange rate at the exact time of the deposit, which formed the basis for the calculation of the acquisition price. In concrete terms, this meant that the Tax Agency assessed that you should be taxed on the value of your undocumented deposits at the time of acquisition.
However, the Minister of Taxation now recognizes that this change in practice regarding undocumented deposits is contrary to the tax authorities' own practice. The reason for this is that the National Tax Tribunal has ruled that the acquisition cost should instead be calculated at DKK 0 in the case of an undocumented deposit.
Thus, there is no taxation of the value of undocumented deposits at the time of acquisition, as this is set to DKK 0. In other words, taxation is moved from the time of insertion to the time of sale of the undocumented deposit.
If person A on January 1, 2022 has an undocumented deposit of 1 bitcoin worth DKK 100,000, A will be taxed on a profit of DKK 100,000 for the 2022 income year.
If A sells his bitcoin for DKK 300,000 on February 1, 2022, he must also be taxed on a gain of DKK 200,000 for the 2022 income year.
In concrete terms, the new practice means that the time of taxation is pushed to the time of sale and not - as previously - the time of insertion.
In the example above, A will therefore not be taxed at the time of deposit of 1 bitcoin, but only when it is sold, where the entire profit of DKK 300,000 will be taxed, as the acquisition price is calculated at DKK 0. If A had not sold his bitcoin in 2022 as in the example above, but rather in 2023, taxation would not be due until 2023, which would result in a lower interest expense on the tax not incurred. If, on the other hand, A has not sold his bitcoin at all, there would be no tax liability.
The new practice thus has particular significance for those who have not realized their undocumented deposits, as they are not (yet) taxed, just as it has significance for those who have been charged interest for the taxation at the time of deposit. Finally, the new practice has an impact on those who have sold their undocumented deposits at a loss. This is because the loss only triggers a tax deduction (~27%), while gains are taxed as personal income (~57%).
As a general rule, you cannot have a decision reopened, and according to section 26 of the Tax Administration Act, you can make changes to your tax no later than May 1 of the fourth year after the end of the income year. However, there is an exception to this in section 27(1)(7) of the Tax Administration Act, according to which an extraordinary reopening can be made by a change in practice published by the Ministry of Taxation. In his answers to the Tax Committee, the Minister of Taxation has announced that he will issue a control signal regarding the change in practice and reopening of the cases.
We expect the Ministry of Taxation to publish the guidance on its website shortly. The Tax Agency must reopen cases on its own initiative that can be identified and that are in favor of the citizens. An affected citizen can also request a reopening of the case under the rules on extraordinary reopening. However, it is important to observe the deadlines for this.
If you want to read the questions and the Minister of Taxation's answers, please refer to questions 120(link) and 121(link).
As Denmark's only specialist office within cryptocurrency, Samar Law has extensive experience in advising on matters concerning the tax treatment of cryptocurrency. If you want advice on taxation of cryptocurrency, we encourage you to contact lawyer Payam Samarghandi at payam@samarlaw.dk or mobile 60793777 for a non-binding conversation.
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