In Denmark, parties in cryptocurrency transactions must resolve whether their asset is classified as a form of payment (currency), a capital asset (investment), or a financial service to determine whether the transaction is subject to the regulation of Danish authorities. Depending on their characteristics, cryptocurrencies in Denmark may be subject to “legislation on alternative investment funds, prospectuses, and money laundering.” The Danish Financial Supervisory Authority (DFSA) has affirmed that cryptocurrencies used as a means of payment are generally not regulated by the DFSA. However, Denmark’s security laws might apply to the ICO depending on its characteristics. Specifically, ICOs that are akin to IPOs will be subjected to Danish securities law.
To determine whether an ICO is subject to the DFSA’s authority, one major factor to consider is whether the token provides investors with decision-making authority over the company’s profits. In one case, the DFSA ruled that a specific ICO was not subject to its authority where “the relevant token did not grant financial or decision rights over the corporation or the corporation’s earnings.” Consequently, the DFSA is not authorized to regulate tokens that do not grant investors voting rights over a corporation.
The DFSA does not regulate cryptocurrencies that are functionally equivalent to Bitcoins since they are not categorized as a financial service. In Denmark, financial services include: (i) the issuance of electronic money, (ii) payments for services, (iii) currency exchanges, or (iv) the issuance of mortgages. Cryptocurrencies that do not fall under one of these categories, like Bitcoin, are not covered by the DFSA’s jurisdiction.
Since Denmark is a member of the European Union, it is bound by the EU’s Anti-Money Laundering Regulations. Cryptocurrency is not explicitly addressed in the legislation. Despite this, the utilization of cryptocurrency as a means for money laundering is illegal because the money laundering laws in the EU are “technology-neutral.” Hence, cryptocurrency cannot be used as a loophole for evading AML regulation in Denmark or elsewhere in the EU. Using cryptocurrency for money laundering may lead to jail time. In one instance, a man in Denmark sanctioned a prison sentence of four years for using Bitcoin in his money-laundering scheme. To avoid prosecution, cryptocurrency firms in Denmark must abide by the EU’s AML regulations.
Whether a cryptocurrency is subject to individual taxes in Denmark depends on the nature of the token’s use. Losses resulting from cryptocurrency transactions are taxed differently depending on the circumstances. According to the Danish Tax Authority (DTA), losses concerning cryptocurrency shall not be deducted from taxes as business losses. Additionally, the DTA’s regulation suggests that cryptocurrency companies cannot deduct business losses since their whole business revolves around cryptocurrency. Even if the value of bitcoin significantly drops, those losses cannot be deducted as a cost of doing business when used as a means of payment. However, losses on the sale of some cryptocurrencies, like bitcoin, are tax-deductible. Nevertheless, these regulations seem to show that cryptocurrencies have fewer tax benefits than other payment forms in Denmark. Concerning Value-Added Taxes (VATs), the DFA proclaimed that cryptocurrencies are legally exempt from paying VATs.
Additionally, the DFA mandated that invoice amounts shall not be issued in cryptocurrencies. Instead, invoice amounts must be issued in Danish currency or another legally recognized currency.
There are several caveats in taxing gains and profits resulting from cryptocurrency. According to the Danish Tax Council (DTC), cryptocurrency profits are subject to income taxation. In contrast, other cryptocurrencies are subject to financial contract taxes if they are tied to another value and are more comparable to structured debt. Here, income gained from the increase in the value of these cryptocurrencies is subject to gains, taxes, and loss deductions in the same way that financial contracts are taxed.
Denmark has furthered a policy of prioritizing tax enforcement for cryptocurrency users. In January of 2019, the Tax Authority declared its plan to gather tax information from cryptocurrency traders to determine whether their customers pay their tax obligations. According to reports by the Finnish Financial Authority (FFA), almost 3,000 Danish residents bought or sold bitcoins, not including other types of cryptocurrency. In Denmark, the value of bitcoin transactions on Finnish trading sites exceeded $15 million. As a result of the widespread use of cryptocurrency within the country, Denmark has increased its interest in prosecuting people who use cryptocurrency to break tax laws.
Regulatory Approaches to Cryptoassets. (2018). Loc.gov. https://www.loc.gov/law/help/cryptoassets/denmark.php