Denmark proposes taxing unrealized crypto gains as it does with some traditional financial contracts

Denmark is proposing a new taxation model that would tax unrealized gains on cryptocurrencies at 42%, aligning digital assets with existing rules for certain financial contracts.

This approach involves calculating gains and losses annually based on the change in the value of the taxpayer’s holdings, regardless of whether the assets have been sold. The taxable income would reflect the difference between the value at the start and end of the year.

Under this inventory-based taxation system, gains would be included as capital income, while losses could be deducted from gains in the same category within the same year. Unused losses could be carried forward to offset future gains. This method aims to provide a consistent framework for taxing financial instruments, including cryptocurrencies.

Denmark’s traditional financial instrument taxation

Denmark handles some traditional financial contracts under the rules established in the Kursgevinstloven (Capital Gains Tax Act), specifically in Sections 29–33. However, only certain types of investments and accounts are subject to taxation on unrealized gains.

1. Inventory-based Taxation (Lagerprincippet):
   Gains and losses on financial contracts are taxed annually based on their value at the beginning and end of the fiscal year, regardless of whether the contract is sold (realized). This system ensures taxation even on unrealized gains.
2. Separation Principle (Separationsprincippet):
   Financial contracts are taxed separately from the underlying asset. This means that the value changes in the financial contract matter for taxation purposes, not necessarily the movements of the underlying asset.
3. Tax Deduction Limitations (Fradragsbegrænsning):
   While companies can generally deduct losses on financial contracts, there are exceptions. For example, losses on specific equity-related contracts, such as those tied to subsidiary or group shares, are limited. These losses can only be deducted from gains on other financial contracts.
4. For Individuals:
   For individual taxpayers, losses on financial contracts can only be deducted from gains within the same category (i.e., financial contracts). Losses can be carried forward and used in future tax years but are subject to limitations.

Some equity exchange-traded funds (ETFs) in Denmark are taxed on unrealized gains annually. These are typically ETFs that accumulate and reinvest dividends and are taxed at rates of 27% or 42% on unrealized gains each year.

Aktiesparekonto (Stock Savings Account)…