Denmark Considers Taxing Unrealized Crypto Gains: Report

The Tax Law Council in Denmark has recommended a proposal to tax unrealized gains and losses on cryptocurrency under an inventory taxation model. This suggestion was announced on October 23 by Danish Tax Minister Rasmus Stoklund, who emphasized the need to address perceived unfair taxation of crypto investors and simplify the tax rules surrounding digital assets.

The proposed bill suggests a uniform tax rate of up to 42% on gains from cryptocurrencies, classifying these gains as capital income.

In its report, the council examined three potential frameworks for taxing crypto assets: capital gains tax, warehouse taxation, and inventory taxation. Ultimately, the inventory model was favored as it streamlines the process for frequent traders and aligns crypto taxation with other financial instruments, such as stocks and bonds.

A key feature of the inventory model is its continuous taxation of both unrealized gains and losses at regular intervals, regardless of whether the assets have been sold. This approach could help eliminate timing strategies that some traders employ, but it may raise concerns among investors who could find themselves taxed on assets they have not yet liquidated.

Additionally, the proposed bill would require crypto entities to report user identities and detailed transaction data to tax authorities. It aims to align with European Union regulations, such as MiCA and DAC8, to ensure consistent oversight, facilitate cross-border cooperation, and enhance the ability of member states to monitor and tax crypto transactions effectively.

However, the bill is not expected to be introduced to Parliament until early 2025 and will undergo evaluation, with an earliest implementation date proposed for January 1, 2026. If passed, Denmark could become the first country to tax unrealized gains on cryptocurrencies.

This recommendation follows a ruling by Denmark’s Supreme Court last year, which established that profits from Bitcoin sales are taxable.

Global Landscape of Crypto Taxation

The issue of taxing cryptocurrency gains is gaining traction worldwide, with various jurisdictions introducing or contemplating regulations. On October 21, the Federal Reserve Bank of Minneapolis urged the government to implement a tax on Bitcoin. Meanwhile, Italy is considering raising its capital gains tax on crypto from 26% to 42%. South Korea is exploring the possibility of a 20% tax on crypto gains, while India maintains a flat income tax rate of 30% on earnings from digital assets.