Estonia has garnered a global reputation as having an outstanding tax code. Due to its straightforward tax system and lack of corporate income tax on reinvested profits, for the ninth year in a row Estonia ranked number one on the Tax Foundation’s International Tax Competitiveness Index.
For individuals and companies based in Estonia, certain elements of the country’s tax code make compensation in crypto a highly attractive option. At the same time, however, ensuring total compliance in regards to crypto holdings and remuneration can quickly become complicated.
Taxation of Crypto in Estonia
The regulatory body that oversees taxes in Estonia, the Estonian Tax and Customs Board, does not define virtual currencies as money or currency but instead categorizes them as assets, which fall under the classification of property.
As a result, in most crypto transactions that result in a profit being made, both individuals and corporate entities are expected to pay a flat rate of 20% taxation on earnings. There are, however, exceptions that must be taken into account.
Taxable Crypto Transactions:
- Crypto that is sold or exchanged for fiat money or crypto when a profit is generated
- Crypto used to pay for goods or services
- Crypto received as payment for goods or services
Non-Taxable Crypto Transactions:
- Donation of crypto
- Crypto bought with fiat money
- Crypto that is transferred between digital wallets owned by the same person
- Crypto given as a gift
Personal Income Tax on Crypto
The Estonian Tax and Customs Board treats all crypto income earned by an individual as Personal Income, and levies a 20% Personal Income Tax. The threshold for tax-free income is €7,848 per year, and anything earned above this income bracket is subject to PIT.
Estonians who have earned an income from trading or selling crypto for fiat money or other crypto are obligated to pay taxes on all profit-generating transactions. This becomes tricky for individuals who are selling and trading crypto on a regular basis.
The Estonian Tax and Customs Board treats every profitable crypto transaction as a separate taxable event that requires individual reporting. In addition, Estonia does not allow for capital losses to be used to offset gains. This means that there is no ability to deduct one’s total losses from total gains to arrive at a reduced tax burden.
Any individual who receives crypto as compensation for goods or services is required to pay Personal Income Tax on their earnings. For employees, this is typically withheld and paid by employers, but for contract workers, this becomes the responsibility of the individual.
For contractors, regardless of whether an employer is based in Estonia or elsewhere, taxes must be paid on any wages received in crypto. In the case of an employee who receives remuneration in crypto that has already had taxes withheld by an employer, further taxes are only owed if those wages are reinvested in crypto and additional profits are earned.
Taxes owed on wages paid in crypto can be calculated by determining the fair market value of the crypto in euros on the date of its receipt.
Corporate Income Tax on Crypto
In Estonia, companies are taxed based on their worldwide income at a flat rate of 20% Corporate Income Tax. Any business income that is generated from crypto transactions is taxed based on its fair market value in euros at the time of its receipt. Estonian-based crypto organizations are responsible for paying Corporate Income Tax on global profits with dividends taxed at the rate of 20/80.
Corporate Income Tax, however, is only imposed on the profits that a company distributes to its shareholders. This means that any profits that a company does not distribute are not taxed, thus incentivizing the reinvestment of dividends.
The remuneration of goods and services in crypto constitutes a taxable event. As such, the payment of contractors in crypto must be reported to the Estonian Tax and Customs Board according to its fair market value in euros on the date of the transfer.
Additional Taxation of Estonia-Based Crypto Companies
Crypto companies that hire Estonian employees are obligated to pay a 33% social tax on business income, which is used to finance pension insurance and state health insurance.
In Estonia, registration for VAT is optional for crypto companies whose annual sales revenue does not exceed €40,000. As soon as that limit is reached, a company will have three days to become a VAT registered entity. In the case of crypto companies exceeding yearly turnover of €40,000, the VAT is a flat rate of 20%
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