The short answer is no. However, there are some important points to consider when assessing a company’s tax liability in connection with cryptocurrency investments. The Danish Tax Council has recently issued a ruling on these matters, which we’ll discuss in this update.
In a binding response dated May 31, 2022, the Danish Tax Council has addressed various questions regarding the taxation of cryptocurrency held by companies.
This is the first binding response where the Tax Council has explained how a company investing in cryptocurrency should be taxed.
The specific case concerns a capital company formed with the purpose of making investments in cryptocurrency and generating returns from these investments.
FIFO OR REALIZATION PRINCIPLE?
Under the Danish Act on Taxation of Gains and Losses on Securities (section 23, subsection 5), companies are generally subject to tax on capital gains and losses on stocks and securities using the realization principle. This means that the profit or loss for the income year is calculated as the difference between the value of the assets at the end of the income year and the beginning of the income year. In practice, this results in taxation of profits (or granting deductions for losses) even if the cryptocurrency has not been sold.
The Danish Tax Council has now confirmed that cryptocurrency held by a company is taxed according to the realization principle. This means that profits (or losses) are only taxed at the time the company disposes of the cryptocurrency. As a result, unrealized gains are not subject to taxation. This is because cryptocurrency is considered a form of property and is not covered by the Danish Act on Taxation of Capital Gains on Listed Stocks and Securities, the Danish Act on Taxation of Capital Gains, or other tax laws. Therefore, the taxation of cryptocurrency in a company is based on sections 4-6 of the Danish State Tax Act.
ARE “GAS FEES” A BUSINESS EXPENSE FOR THE COMPANY?
When conducting transactions with cryptocurrency, a fee, commonly referred to as ‘gas fees,’ is typically paid to the blockchain network. The question is whether a company investing in cryptocurrency can deduct this expense as a business expense under section 6, subsection 1, letter a of the Danish State Tax Act. The condition for such a deduction is that the expense must be incurred to acquire, secure, and maintain the company’s income. Additionally, there must be a direct and immediate connection between the expense and the acquisition of income.
In this case, the Danish Tax Council found that, in line with other practices, gas fees cannot be deducted as a business expense. Instead, they should either be added to the acquisition cost or deducted from the disposal proceeds.
Finally, the Danish Tax Council confirmed that the FIFO (First In, First Out) principle is also applied to a company’s transactions with cryptocurrency unless the disposed cryptocurrency can be identified. In that case, the asset-by-asset principle should be applied.
You can read the Danish Tax Council’s ruling here.
CONTACT US TODAY
As Denmark’s only specialized firm in cryptocurrency matters, Samar Law has extensive experience in advising on cryptocurrency taxation cases. If you have received a letter from the Danish Tax Authority and are unsure about what to do, we encourage you to contact attorney Payam Samarghandi at payam@samarlaw.dk or on mobile at +45 60793777 for a non-binding consultation.
