Denmark considering 42% tax on unrealized gains and losses for cryptocurrencies

Denmark Tax Council has proposed enacting a new regulation to tax residents’ unrealized gains and losses on cryptocurrencies. The proposed law is meant to unify all tax regulations relating to crypto assets and streamline the process.

According to reports, The Council is considering imposing up to 42% capital gains tax that will apply to crypto holders annually regardless of whether they sold or did not sell off their assets. The proposal is part of the recommendations in a 93-page report that analyses crypto taxation.

In the report, the Tax Council headed by the Minister of Taxation Rasmus Stoklund discussed three possible models for taxing crypto assets: capital gains tax, inventory tax, and warehouse tax.

Stoklund claims that the conventional capital gains tax regime does not fully favor crypto holders, as there have been several instances when they have been taxed unfairly. Therefore, a new tax law specific to crypto will address the problem.

While the report analyzed all three models, it seems to favor an inventory approach to taxation, which requires that a crypto investor’s entire portfolio be treated as a single inventory and taxed annually at a specific date. By doing this, the Tax Council equates digital assets with traditional securities, which are also taxed using the inventory approach.

Denmark’s proposed law could come into effect by 2026

Meanwhile, the proposed bill is set for introduction on the floor of the Danish Parliament by 2025, with the minister noting that he will present the bill before the parliament. However, the Council noted that any enforcement will not happen until January 2026.

Although the proposed bill has already generated some uproar, particularly from the crypto community, it is still quite far from becoming a law. The parliament is expected to deliberate on the law, and there might be some changes before approval. However, the rate is unlikely to change given that 42% is the standard capital gains tax in Denmark.

Beyond imposing taxes, the bill will compel crypto asset service providers to provide information about their customers’ transactions to the European Union’s government authorities. This is already integral to the EU Markets in Crypto Assets (MiCA) law.

Interestingly, there is no mention of whether the law will apply retrospectively to existing crypto holdings, even though there are speculations along that line.

A retrospective law could prove particularly damaging for long-term holders of crypto, as they would have to pay taxes on the value of their assets over time. For example, someone who has been holding Bitcoin since 2009 might have to shell out 42% of the increase in the value of the flagship asset from that time until now.

Potential impact on crypto holders 

So far, concerns from the crypto community stem primarily from what many people believe is an attempt by the governments of various countries to control the crypto industry. The Italian government is also considering raising the tax on Bitcoin from 26% to 42% by 2025, while Democratic Party Presidential candidate Kamala Harris also proposed a 25% tax on unrealized gains.

Given recent anti-Bitcoin papers published by government-backed researchers, the crypto community’s concerns are not far-fetched. Researchers from the European Central Bank (ECB) and Minneapolis Federal Reserve Bank have proposed a ban or tax on Bitcoin, citing reasons such as wealth distribution and helping governments maintain primary deficits.

Nevertheless, many believe that implementing the law might prove tricky and could prevent it from passing. A tax on unrealized gains for crypto holders might force the investor to sell the same assets to afford the taxes.

Source: https://www.cryptopolitan.com/denmark-considering-crypto-tax/