Finnish Cryptocurrency Market: Analysis of Taxation, Regulation and Future Trends

Author: TaxDAO

Developed economies mainly in North America and Europe are gradually establishing tax management and regulatory frameworks for cryptocurrencies. Globally, the number of jurisdictions imposing taxation, anti-money laundering and anti-terrorism financing regulations on cryptocurrencies is also on the rise, but doubts about the safety and sustainability of cryptocurrencies have never slowed down.

Recently, the European Commission announced the digital euro (Digital Euro) legislative proposal as scheduled, heralding the arrival of the digital euro era. Therefore, it is necessary to analyze the encryption taxation and supervision of Finland, a founding member of the euro zone, and pass Finland’s attitude towards cryptocurrency. Discuss its future development trend. This article will give an overview of the Finnish tax system, cryptocurrency supervision and participation in multilateral cryptocurrency tax governance, so that investors can understand how to declare and pay taxes correctly, and help investors better plan their investments and analyze costs . Secondly, paying close attention to the cryptocurrency tax dynamics and regulatory changes in various countries can help investors understand the government's attitude and policy direction towards cryptocurrencies. This has important implications for making sound investment decisions, formulating long-term strategies and assessing market risks.

1. Finnish tax system

As the country that has ranked first in the World Happiness Report for six consecutive years, Finland has the world's most sound social security system and high-quality public services, and the high social welfare comes from Finland's high level of taxation. In 2021, Finland's total tax rate is 43%, which is much higher than the average tax rate of 34.1% in OECD, but its corporate income tax is only 20%, which is lower than the average level of 21.94% in OECD countries. is one of the most competitive countries.

(1) Personal Income Tax

Personal taxable income includes salary income, capital gains, and income from social welfare programs (such as unemployment insurance, government pension plans, and health insurance), which are taxed by the state (National Tax), municipal (Municipal tax) and church (Church Tax) ) separately. The income tax levied by the state is taxed according to the progressive system. The higher the income, the more the share that needs to be paid.

Table 1.1 Finnish personal income tax brackets in 2023

Source: PWC: Finland Individual-Taxes on personal income, June 2023

Capital gains and dividend income are taxed at a fixed rate. The tax rate for annual investment income of 30,000 euros and below is 30%, and the tax rate for the part exceeding 30,000 euros is 34%. The tax rate for the part collected by local municipalities is determined by the local municipalities. In 2023, the municipal tax rates across Finland will range from 4.36% to 10.86%, with an average municipal tax rate of 7.38%. Church tax is only payable by members of the Evangelical Lutheran Church in Finland, the Orthodox Church and the Finnish German Church to their churches. The tax rate varies between 1% and 2.10%, depending on the parish.

(2) Corporate Income Tax

All resident companies operating in Finland as well as non-resident companies, branches and permanent establishments are subject to corporate income tax. Partnerships are not considered separate taxable entities, but each partner is taxed on the basis of the partnership's taxable income based on its share of the partnership's income. The corporate income tax adopts a flat tax rate of 20%.

(3) Consumption tax

Finland's standard value-added tax (VAT) rate is 24%, and it also implements two types of low tax rates of 10% and 14%. Among them, the tax rate for catering services, food and animal feed is 14%, and the tax rate for paper or electronic books, Newspapers and periodicals, passenger transportation and accommodation services, pharmaceuticals, television and radio business expenses, tickets for cultural, artistic, sports and entertainment activities, self-made and sold works of art, royalties, and public performance remuneration are taxed at a rate of 10%. Social welfare, health and medical services, public education, financial and insurance services, etc. are exempt from VAT. In addition, Finland also imposes special excise taxes on certain goods and services, such as energy taxes and tobacco and alcohol taxes.

(4) Other taxes

Other taxes levied in Finland include: property tax, insurance tax, real estate tax, vehicle tax, etc.

2. Finnish encryption tax system and supervision

In order to protect cryptocurrency investors, prevent tax evasion and money laundering, avoid systemic risks and ensure market integrity, in addition to regulating cryptocurrency providers and trading venues, Finland also imposes taxes on cryptocurrencies.

(1) Regulatory situation of cryptocurrency

On October 4, 2018, the Finnish government published Government Proposal 167/2018 (HE 167/2018), proposing a law on banking and payment account monitoring systems and virtual currency providers. Virtual currency providers will be considered other financial market operators referred to in the Financial Supervision Act and will be required to pay regulatory fees.

On April 26, 2019, the Finnish Financial Supervisory Authority (Finnish Financial Supervisory Authority, FIN-FSA) announces the Act on Virtual Currency Providers (572/2019) (The Act on Virtual Currency providers (572/2019)) entered into force on 1 May 2019. According to the bill, the Finnish Financial Supervisory Authority will act as a registry and supervisory authority for virtual currency providers. Any virtual currency-related services such as "virtual currency transaction services", "custodial wallet providers" and "virtual currency issuers" must be registered in Finland. These providers must meet certain statutory requirements, must segregate client funds from their own funds, and comply with anti-money laundering and anti-terrorist financing regulations. Furthermore, registration is only possible if the applicant has the right to operate a business in Finland. The so-called "right to operate business in Finland" means that the applicant must be established in Finland, and for overseas companies, it is necessary to have a branch in Finland. On the other hand, as long as the service provider is established in Finland (it can be a permanent establishment or a branch) or promotes services or products to Finnish individuals or any organization in a cross-border manner (even if the service provider does not have any local presence), it is covered by the Act. within the scope of regulation and application.

Secondly, in the "Act on Bank and Payment Account Monitoring System" (571/2019, revised edition, hereinafter referred to as "Account Monitoring Law") (The Act on Bank and Payment Account Monitoring (571/2019)), virtual currency providers are required to provide customer information to banking and payment account registration agencies owned by the Finnish Customs. The Finnish Financial Supervisory Authority has also published Regulations and Guidelines (4/2019) for virtual currency providers, which address the holding and protection of customer assets (including virtual currencies), customer due diligence, and risk management systems.

However, the registration obligation does not apply in the following cases:

• Natural or legal persons providing virtual currency services within a limited network, for example, a network closed to the public and requiring registration;
• natural or legal persons who occasionally provide virtual currency services in other professional activities requiring authorization, registration or prior approval;
• Virtual currencies issued by central banks and other institutions.

(2) Encryption Tax System

The Finnish Tax Administration (Vero) does not consider cryptocurrencies similar to legal tender such as the euro, nor as legal payment instruments, but as a type of personal asset that can be freely traded on the open market. The official definition of "cryptocurrency" is a form of digital value with the following characteristics:

• There is no central bank or other public institution as an issuer, nor is it considered a legal payment instrument;
• Can be used by individuals to settle debts; *Electronic transfer, electronic storage and electronic exchange are possible.

Simply exchange one cryptocurrency for one or more other cryptocurrencies, trade cryptocurrencies against fiat currencies such as USD or EUR, use cryptocurrencies to buy goods or services, trade non-fungible tokens (NFTs) , Participate in cryptocurrency pledges or obtain income from leveraged/futures transactions are required to pay. This article will provide a more detailed introduction to the types of taxes below.

1. Taxed as capital gains tax

Generally, the purchase of cryptocurrencies or the transfer of money within a cryptocurrency wallet or cryptocurrency exchange is not taxed, but profits from the sale of cryptocurrencies are subject to capital gains tax. If the total transaction volume of cryptocurrencies exceeds 1,000 euros, it needs to be treated as income and taxed according to regulations. The tax rate is 30% for profits up to and including 30,000 euros and 34% for profits over 30,000 euros.

2. Collected as income tax

Income from mining cryptocurrencies (mining) is subject to a personal income tax of up to 31.25%. Furthermore, salaries or freelance payments in cryptocurrencies are taxed the same as payments in euros or other fiat currencies.

In short, according to the Finnish Tax Administration, sales, transactions or purchases using cryptocurrencies are subject to capital gains tax, while earning cryptocurrencies is subject to income tax as wages or remuneration.

3. The future development trend of cryptocurrency in Finland

Currently, buying, selling and using cryptocurrencies is legal in Finland. The Finnish government is also committed to building a good cryptocurrency investment environment through legislative supervision and participation in multilateral governance, but the trend of recognizing cryptocurrency as legal tender is still unclear. This article also believes that, combined with the current characteristics of cryptocurrencies and the stormy market environment, the supervision of cryptocurrencies in Finland will only be gradually tightened, but the trend of tax compliance will become complicated due to the participation of multiple parties.

(1) Regulatory and tax compliance trends of cryptocurrencies

In November 2022, the bankruptcy of FTX, the world's second largest encrypted asset exchange, caused shocks in the industry. The tragic collapse caused by the "barbaric growth" of its platform has aroused the vigilance and attention of governments around the world. The (pseudo-)anonymity of crypto assets also creates data gaps for regulators and may create unnecessary conditions for money laundering and terrorist financing. While authorities may be able to trace illicit transactions, they may not be able to identify the parties involved in such transactions. At present, most countries and regions have imperfect regulatory mechanisms, and the encrypted asset ecosystem is under different regulatory frameworks in different countries, leading to cross-border tax evasion, which makes coordination more challenging. Therefore, ensuring the stability of cryptocurrency trading platforms and the transparency of encryption taxes requires multilateral governance and supervision.

The EU’s Fifth Anti-Money Laundering Directive (AMLD5) extends the coverage of the Fourth Anti-Money Laundering Directive (AMLD4) to “providers of services engaging in transactions between virtual currency and fiat currency” and “custodial wallet providers”. Finland’s Virtual Currency Providers Act and Account Detection Act builds on the Fifth Anti-Money Laundering Act, with some obligations even exceeding it, to ensure that all cryptocurrency transactions are conducted within the jurisdiction. The Sixth Anti-Money Laundering Act (AMLD6) issued in 2020 has expanded the scope of obligations for companies related to a large number of financial transactions, and also emphasized individual accountability, while introducing enhanced penalties for cross-border cooperation between member states and mechanism.

On May 13, 2023, the Markets in Cryptoassets Regulation (MiCA) also received final approval from the Council of the European Union and is expected to be implemented from 2024. EU countries will have the world's first comprehensive set of rules governing crypto assets. The regulation aims to establish a framework for the issuance of crypto-assets and the provision of services related to them, which also includes stablecoins. The regulations also require companies that issue and trade encrypted assets, tokenized assets, and stablecoins in 27 EU countries, including Finland, to obtain corresponding licenses and require stablecoin issuers to hold appropriate reserves. From January 2026, service providers will be required to know the names of the sender and receiver of cryptoasset transactions, regardless of the amount transferred.

As one of the member states of the OECD, Finland will also follow the "Encrypted Assets Declaration Framework and Amendments to the Common Reporting Guidelines" issued in 2023, and report the foreign resident account information in its financial institutions to its tax authorities in batches. And carry out automatic exchange of tax-related information to improve the transparency of global tax information and ensure the security of cryptocurrency transactions.

Finland actively participates in multilateral regulatory and tax governance, helping to strengthen cross-border coordination to ensure the effectiveness of supervision and enforcement. According to the current trend, Finland will only tighten the regulation of cryptocurrencies and its platforms, and further improve the market regulatory framework. However, multilateral governance involves information sharing and may involve people's concerns about personal privacy, and it will also become complicated due to the competition of different political parties, and there is a long way to go in terms of tax compliance.

(2) Trend of "legal monetization" of cryptocurrency

As mentioned earlier, Finland does not consider cryptocurrencies as "currency", or a legal payment instrument, but rather personal assets that can be circulated and exchanged in the market. An adviser to the Bank of Finland has said the concept of cryptocurrencies is a "fallacy." Its security, stability, and sustainability remain serious challenges if it is to be legally considered a legal payment currency.

Second, the emergence of cryptocurrency technology has also promoted the transformation of the digital economy. The development of new digital payment technology has prompted the central banks of various countries to actively respond and accelerate the implementation of legal digital currencies to maintain the stability of the financial system while protecting monetary autonomy. The humanities of the European Commission will give the digital euro and the cash euro the same legal tender status through legislative procedures. Its implementation is not only to cater to the global digital currency trend, but also to seize the commanding heights of global cross-border payments. Bank of Finland Governor Olli Rehn said in a speech at the University of California, Berkeley that digital currencies released by the central bank are more trustworthy than privately issued and managed payment methods. He also quoted the European Central Bank's previous view that the digital euro will help ensure that the central bank always plays an anchoring role in the EU monetary system, and advocated that the digital euro maintains the stability and reliability of the monetary system.

In general, in the era of digitalization of the economy and rapid growth of cryptocurrencies, it is very important to ensure the safety of cryptocurrency investors and supervise trading venues, improve transaction transparency and track transaction information. Finland has shown its importance to cryptocurrencies by introducing strict laws and regulations and actively participating in the multilateral governance of cryptocurrencies, but it also does not trust such decentralized digital assets. Therefore, this article believes that ** according to the current situation However, the cryptocurrency cannot be recognized by Finland for the time being, and it will be strictly controlled when it becomes a legal tender. The country's positive attitude towards the digital euro will also affect the future development and status of cryptocurrencies in the country. **