On 15 November 2024, the Finnish Supreme Administrative Court (Korkein hallinto-oikeus) ruled on the method for calculating capital gains tax on Bitcoin transactions, affirming the application of the “First In, First Out” (FIFO) method over the “average cost” method.1
In this GMS Flash Alert, we analyse the case and its impact on calculating capital gains tax on Bitcoin transactions, but also on other virtual currency transactions of similar nature.
Virtual currencies, such as Bitcoin, have emerged as a relatively new but increasingly popular investment type. In some cases, globally-mobile employees hold Bitcoin accounts while they are subject to Finnish tax law.
The court case discussed in this newsletter provides much-needed clarity on how the Finnish tax authorities handle capital gains from Bitcoin in the absence of previous similar cases and the lack of clear guidance from the Finnish Tax Administration (Verohallinto). Previously, investors might have relied on alternative methods, such as the average cost method, for calculating capital gains taxes based on detailed guidance available on the tax authority's website.2
Furthermore, this case aligns the legal framework for taxing virtual currencies more closely with existing laws governing other financial assets like shares and investment funds. This alignment helps ensure consistency and fairness in the taxation process across different types of financial assets.
The decision also offers clear legal guidance for investors on how to report Bitcoin and presumably other cryptocurrency transactions. It specifies the methods for calculating gains, emphasising the importance of tracking and recording transactions meticulously. This clarity is crucial for investors to comply with tax regulations and avoid potential legal issues in the future.
Although the case specifically concerns Bitcoin, it could be possible to apply the principles and interpretations to other virtual currencies as well. This broader applicability helps in establishing a consistent approach to the taxation of various digital assets.
The case involved an individual, referred to as ‘A’, who had traded Bitcoin since 2013 in multiple transactions. The virtual currency was held in a cryptocurrency “wallet,” where it appeared as non-identified units, making it impossible to track or individually identify the Bitcoin transferred. The parties to this case were seeking to clarify whether the capital gains from Bitcoin transactions should be calculated using the FIFO method or the average cost method, which is typically applied to assets acquired in multiple batches.
Under the FIFO method, virtual currencies are considered transferred in the order they were acquired. In the average cost method, it is assumed that the taxpayer would sell a proportional part of each batch of virtual currency acquired at different times and at different prices.
As stated above, based on the Finnish Tax Administration’s detailed guidance and legislation on the taxation of business income, “the acquisition cost of current assets is determined on the basis of the FIFO-method unless the taxpayer is able to prove otherwise, so in other words, the valuation can either be based on the asset’s actual acquisition price or on FIFO.”3
In this case, 'A' tried to claim that he could apply the average cost method for calculating the capital gains from the disposal of virtual currencies, as established by the Supreme Administrative Court's ruling in 1984 (KHO 1984-B-II-581). According to the decision, the average cost method is applied in situations where it is impossible to identify the disposed asset. After 1984, the Finnish Income Tax Act (tuloverolaki, 1535/1992 – section 47, subsection 4) stated that certain assets are considered transferred, unless the taxpayer demonstrates otherwise, in the order they were acquired, that is, using the FIFO method.4 When the 1984 ruling was made, Finnish tax law did not yet include this provision.
The Supreme Administrative Court considered the nature of Bitcoin and its distinction from other assets like shares or investment fund units. It ruled that Bitcoin transactions are best treated under the same principles as shares or investment fund units under the Finnish Income Tax Act. The Court found that Bitcoin, like other assets that rely on digital records for transactions, should apply the FIFO method. This ruling aligns with previous tax practices applied to similar assets, despite the original wording of the law not explicitly covering virtual currencies at the time of its formulation.
As a result, the Supreme Administrative Court upheld the decision of the lower administrative court and affirmed that ‘A’ must calculate capital gains from Bitcoin using the FIFO method, in line with established tax practices.
Virtual currencies have become an increasingly popular way to invest, but there are still many open questions regarding their taxation. It is crucial that clear guidelines be established to help taxpayers navigate these new situations. Investors must be able to follow the new rules, and new, detailed guidelines issued by authorities play a key role in this process.
Heretofore, there have been some ambiguities in the Finnish Tax Administration’s guidelines regarding the methods that can be used when reporting virtual currencies. As we have pointed out, the guidelines state that “the acquisition cost of current assets is determined on the basis of the FIFO method unless the taxpayer is able to prove otherwise.” This guidance can cause confusion and difficulties for investors who need to report income or gains from trading virtual currencies. This decision made by the Finnish Supreme Administrative Court clarifies the situation.
In addition, this case strengthens the legal framework, by providing investors with the necessary tools and information to manage their cryptocurrency investments responsibly.
Taxpayers will need to pay particular attention to keep accurate track of their investments, as this will be crucial to compliance and appropriate taxation. Especially when submitting tax returns it is important to report all necessary information in the correct way. In future, the tax authorities are expected to pay closer attention to the reporting of virtual currencies, which is why taxpayers must track any taxable income arising from virtual currencies and make sure that all transactions related to these activities are documented properly.
1 KHO:2024:123 - Korkein hallinto-oikeus (available only in Finnish).
2 (In English) Finnish Tax Administration / Verohallinto, “Taxation of virtual currencies - vero.fi” (also available in Swedish and Finnish at this link).
3 Ibid.
4 Tuloverolaki 1535/1992 - Ajantasainen lainsäädäntö - FINLEX ® (available only in Finnish) “The Income Tax Act.”
The information contained in this newsletter was submitted by the KPMG International member firm in Finland.
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