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

Developed economies, particularly in North America and Europe, are progressively establishing tax management and regulatory frameworks for cryptocurrencies -- an increasing number of regions are implementing regulations for taxing cryptocurrencies, combating money laundering, and addressing counter-terrorism financing. However, concerns regarding the security and sustainability of cryptocurrencies persist. The European Commission released an anticipated legislative proposal for the Digital Euro, signaling the advent of the digital Euro era. Consequently, it is crucial to examine Finland's tax system and regulatory landscape concerning cryptocurrencies. As a founding member of the Eurozone, Finland's stance towards cryptocurrencies can offer insights into its future development trends.

This article aims to provide a concise overview of Finland's tax system, the current regulatory environment for cryptocurrencies, and its participation in multilateral cryptocurrency tax governance. This will aid investors in comprehending the correct procedures for reporting and fulfilling tax obligations related to cryptocurrencies, while also facilitating the improvement of investment strategies and cost analysis. Moreover, closely monitoring the cryptocurrency tax dynamics and regulatory changes in various countries can help investors understand the government's attitude and policy direction towards cryptocurrencies. This is crucial for making informed investment decisions, formulating long-term strategies, and assessing market risks.

Finnish Tax System

As the country that has topped the World Happiness Report for six consecutive years, Finland boasts the most comprehensive social security system and high-quality public services, which are supported by its high-level taxation. In 2021, Finland's total tax rate was 43%, significantly higher than the OECD average of 34.1%. However, its corporate income tax is 20%, lower than the OECD countries' average of 21.94%, making it one of the most competitive countries in the European Union and the OECD.

Personal Income Tax: Individuals' taxable income includes salary income, capital gains, and social welfare plan income (such as unemployment insurance, government pension plans, and medical insurance). This tax is collected separately by the National Tax, Municipal Tax, and Church Tax. The national income tax is calculated using a progressive tax rate system, where the higher the income, the higher the amount of tax owed.

Table 1.1 Finland Personal Income Tax Brackets for the Year 2023

Taxable income (EUR) | Tax on column 1 (EUR) | Tax on excess

Over | Not over

0 | 19,900 | 0 | 12.64

19,900 | 29,700 | 2,515 | 19.00

29,700 | 49,000 | 4,377 | 30.25

49,000 | 85,800 | 10,215 | 34.00

85,800 | 22,727 | 44.00

Table1

Source: PwC: Finland Individual Taxes on Personal Income, June 2023

Capital gains and dividend income are taxed at fixed rates. For annual investment income up to 30,000 euros, the tax rate is 30%, and for the portion exceeding 30,000 euros, the tax rate is 34%. The local municipal tax rate is determined by each municipality. In 2023, the municipal tax rates in Finland 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, the Orthodox Church, and the Finnish German Church in Finland. The tax rate varies from 1% to 2.10% depending on the parish.

Corporate Income Tax: All resident companies operating within 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 are taxed based on the proportion of their income in the partnership's income, and each partner's tax is calculated according to their share of the taxable income of the partnership. The corporate income tax is a flat rate of 20%.

Value Added Tax (VAT): The standard VAT rate in Finland is 24%, and there are also two reduced rates of 10% and 14%. The 14% rate applies to restaurant services, food and animal feed. The 10% rate applies to printed or electronic books, newspapers and periodicals, passenger transport and accommodation services, medicines, television and radio broadcasting fees, tickets to cultural and entertainment events, art created and sold by the artist, royalties, and public performance fees. Social welfare, health and medical services, public education, financial and insurance services, among others, are exempt from VAT. Additionally, Finland imposes special consumption taxes (excise tax) on specific goods and services, such as energy and alcohol taxes.

Other Taxes: Other taxes levied in Finland include property tax, insurance tax, real estate tax, vehicle tax, among others.

Cryptocurrency Taxation and Regulatory Situation in Finland

Finland regulates and taxes cryptocurrencies in addition to overseeing cryptocurrency providers and trading venues to protect cryptocurrency investors, prevent tax evasion and money laundering, mitigate systemic risks, and ensure market integrity.

Regulatory Situation of Cryptocurrencies

On October 4, 2018, the Finnish government issued Government Proposal 167/2018 (HE 167/2018), which proposed the establishment of a law on the monitoring of banks and payment accounts, including virtual currency providers. Virtual currency providers are considered as other financial market operators mentioned in the Financial Supervision Act and are required to pay regulatory fees.

On April 26, 2019, the Finnish Financial Supervisory Authority (FIN-FSA) announced the Act on Virtual Currency Providers (572/2019), which came into effect on May 1, 2019. According to this Act, the FIN-FSA serves as the registration and supervisory authority for virtual currency providers. Any virtual currency-related service providers in Finland, such as "virtual currency exchange services," "custodian wallet providers," and "virtual currency issuers," must be registered. These providers must meet certain statutory requirements, keep customer funds separate from their own funds, and comply with anti-money laundering and anti-terrorism financing regulations. Additionally, registration is only allowed for applicants with the right to operate a business in Finland. The term "the right to operate a business in Finland" means that the applicant must be established in Finland or, for foreign companies, have a branch located in Finland. In essence, as long as the service provider is established in Finland (as a permanent establishment or branch) or promotes services or products to Finnish individuals or entities in a cross-border manner (even if the service provider has no physical presence in Finland), they fall within the scope of this Act's regulation and applicability.

Furthermore, under the Act on Bank and Payment Account Monitoring System (571/2019, revised, hereinafter referred to as the "Account Monitoring Act"), virtual currency providers must provide customer information to the Bank and Payment Account Registration Authorities of Finnish Customs. The FIN-FSA has also issued Regulations and Guidelines (4/2019) concerning virtual currency providers, which cover aspects such as 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 persons or legal entities providing virtual currency services within a limited network, for example, networks closed to the public and requiring registration.

Natural persons or legal entities occasionally providing virtual currency services in other activities requiring authorization, registration, or prior approval.

Virtual currencies issued by central banks and other institutions.

Cryptocurrency Taxation

The Finnish Tax Administration (Vero) does not consider cryptocurrencies as legal tender like the Euro or as official payment instruments. Instead, they are viewed as a type of personal asset that can be freely traded in the open market. The official definition of "cryptocurrency" in Finland is a form of digital value with the following characteristics:

Not issued by a central bank or other public institution and not considered legal tender.

Can be used by individuals to settle debts.

Can be electronically transferred, stored, and exchanged.

Any exchange of one cryptocurrency for one or more other cryptocurrencies, transactions between cryptocurrencies and fiat currencies (such as US dollars or Euros), using cryptocurrencies to purchase goods or services, trading non-fungible tokens (NFTs), participating in cryptocurrency staking, or earning income from leverage/futures trading all require taxation. The following sections provide a more detailed introduction to the types of taxes.

Subject to Capital Gains Tax: Generally, purchasing cryptocurrencies or transferring them within cryptocurrency wallets or exchanges does not incur taxes. However, the profits gained from selling cryptocurrencies are subject to capital gains tax. If the total cryptocurrency transactions exceed 1000 Euros, the gains must be reported as income and taxed according to the regulations. The tax rate for gains up to 30,000 Euros is 30%, and for amounts exceeding 30,000 Euros, it is 34%.

Subject to Income Tax; Income derived from mining cryptocurrencies is subject to a personal income tax rate of up to 31.25%. Additionally, if cryptocurrencies are used as salary or compensation for self-employed individuals, the taxation is the same as for payments made in Euros or other fiat currencies.

In summary, according to the Finnish Tax Administration, using cryptocurrencies for sales, transactions, or purchases requires payment of capital gains tax, while earning cryptocurrencies is subject to income tax as salary or compensation.

Future Development Trends of Cryptocurrencies in Finland

Buying, selling, and using cryptocurrencies in Finland is currently legal. The Finnish government committed to build a favorable environment for cryptocurrency investments through legislative regulation and participation in multilateral governance. However, the trend of recognizing cryptocurrencies as legal tender remains uncertain. Considering the current characteristics of cryptocurrencies and the volatile market environment, Finland's regulatory measures on cryptocurrencies are likely to tighten gradually, while tax compliance may become more complex due to the involvement of multiple parties.

Regulatory and Tax Compliance Trends for Cryptocurrencies

In November 2022, the bankruptcy of FTX, the world's second-largest cryptocurrency exchange, caused upheaval in the industry and caught the attention of governments worldwide due to the disastrous consequences resulting from its rapid expansion. The (pseudo) anonymity of cryptocurrencies poses challenges for regulatory authorities, potentially facilitating illicit activities like money laundering and terrorist financing. While authorities may possess the ability to trace unlawful transactions, identifying the parties involved can be difficult. Currently, many countries lack comprehensive regulatory frameworks, leading to differing rules for cryptocurrencies across borders, enabling cross-border tax evasion and complicating coordination efforts. Thus, establishing stable cryptocurrency trading platforms and transparent taxation requires international cooperation and regulation.

The EU's Fifth Anti-Money Laundering Directive (AMLD5) broadened the scope of the Fourth Anti-Money Laundering Directive (AMLD4) to include "providers engaged in exchange services between virtual currencies and fiat currencies" and "custodian wallet providers." Finland's legislation on virtual currency providers and account monitoring is based on AMLD5, with additional obligations to ensure all cryptocurrency transactions occur within its jurisdiction. The Sixth Anti-Money Laundering Directive (AMLD6), issued in 2020, further expanded obligations for various financial transaction-related entities, emphasized individual accountability, and introduced stronger penalties and cross-border cooperation mechanisms among EU member states.

On May 13, 2023, the Market in Crypto-Assets Regulation (MiCA) received final approval from the EU Council and is scheduled for implementation starting in 2024. This regulation will provide the first comprehensive set of rules for global cryptocurrency regulation among EU member countries. MiCA aims to establish a framework for issuing cryptocurrencies and related services, including stablecoins. It mandates companies issuing and trading cryptocurrencies, tokenized assets, and stablecoins in all EU 27 countries, including Finland, to obtain appropriate licenses and requires stablecoin issuers to hold adequate reserves. From January 2026 onwards, service providers must identify both the sender and receiver of cryptocurrency transactions, regardless of the transfer amount.

As an OECD member, Finland will also adhere to the revised "Common Reporting Standard and Model Mandatory Disclosure Rules for Cryptocurrencies," published in 2023. This involves bulk reporting of information on foreign residents' accounts held in the country's financial institutions to its tax authorities, facilitating the automatic exchange of tax-related information globally and enhancing tax transparency for cryptocurrency transactions.

Finland actively engages in multilateral regulation and tax governance to strengthen cross-border cooperation for effective supervision and enforcement. Based on current trends, Finland is likely to strengthen regulations for cryptocurrencies and their platforms while further enhancing the regulatory framework. However, multilateral governance may involve information sharing concerns and raise issues of personal privacy, potentially complicating tax compliance due to varying political interests.

Trend of "Legalizing" Cryptocurrencies

As aforementioned, Finland does not classify cryptocurrencies as "currency" or official payment instruments; rather, they are considered personal assets that can be traded and exchanged in the market. A Bank of Finland consultant once described the concept of cryptocurrencies as a "false belief." The difficulty in recognizing cryptocurrencies as legal tender stems from concerns about their security, stability, and long-term viability.

Furthermore, the rise of cryptocurrency technology has led to a transformation in the digital economy. The development of new digital payment technologies has spurred central banks worldwide to take proactive measures in expediting the implementation of central bank digital currencies (CBDCs) to safeguard monetary autonomy and uphold financial system stability. For instance, the European Commission intends to grant the digital Euro equivalent legal currency status to physical Euro through legislative measures. The introduction of CBDCs not only aligns with the global trend of digital currencies but also seeks to secure a prominent position in global cross-border payments. Bank of Finland Governor Olli Rehn, in a speech at the University of California, Berkeley, emphasized that central bank-issued digital currencies are more reliable compared to privately issued and managed payment methods. He also cited the European Central Bank's previous stance that the digital Euro would ensure the central bank's continuous role as an anchor in the EU's monetary system, promoting the stability and trustworthiness of the digital Euro.

Succinctly, in the era of economic digitalization and rapid growth of cryptocurrencies, ensuring the safety of cryptocurrency investors and regulating trading platforms, enhancing transaction transparency, and tracking transaction information are crucial. Finland's issuance of strict laws and regulations and active participation in multilateral governance demonstrates its attention to cryptocurrencies. However, the country also exhibits distrust towards decentralized digital assets. Therefore, cryptocurrency may not be recognized as legal tender in Finland, and its regulation is likely to be stringent. The country's positive attitude towards the digital Euro will also influence the future development and status of cryptocurrencies in the country.