Denmark’s New Crypto Bill Proposes Tax on Unrealized Gains

Denmark's Groundbreaking Tax Strategy on Crypto Unrealized Gains Unveiled

Denmark will enact a new crypto bill, which could impact the crypto market investors. The Danish Tax Law Council has pushed ahead a piece of legislation taxing unrealized gains and losses on investors' holdings of crypto assets from January 2026.

The first of its kind in the series of crypto tax bills, the new bill seeks to assimilate the taxation of digital assets as compared to their traditional counterparts.

Current Crypto Regulations in Denmark

Cryptocurrency transactions in Denmark must classify an asset as either a currency (payment), capital asset (investment), or financial service. This classification determines which regulation is applied by the Danish authorities.

• DFSA Regulation: The Danish Financial Supervisory Authority (DFSA) normally does not regulate cryptocurrencies used for purely payment purposes. However, when Initial Coin Offerings (ICOs) are made to resemble the more traditional form of Initial Public Offerings, the Danish securities law may apply.
• ICO Regulations: A token in an ICO that allows a right to decide over the profits of the company would be under the regulation of DFSA. Those who do not hold such rights are not under DFSA regulation.
• Exclusion from Financial Service: Cryptocurrencies like Bitcoin are not classified as part of the service of financials, and therefore not included under DFSA.
• AML Policy of EU Countries: Being an EU country member, Denmark adheres to the directives of AML. Using cryptocurrencies in money laundering is thus unlawful and under prisoner's terms.
• Taxation in Crypto: The earnings from cryptocurrency trade are generally taxed. Losses, however, made from business transactions that involve the use of cryptocurrency cannot be included as costs. VATs are exempted though invoices should always appear in Danish or other recognized currencies internationally.
• Tax Compliance Efforts: Denmark has fully engaged the efforts for tax compliance by gearing up the machinery enforcing tax levied on cryptocurrencies and proper declaration of transactions, especially those conducted over Finnish trading sites usually accessed by Danes.

New Proposal Review

Denmark's crypto bill, recently submitted by the Tax Law Council, would tax an investor's unrealized gains in digital assets. According to the crypto bill, Danish crypto investors would be required to pay taxes on the assets, including Bitcoin and others, based on their gains as if sold annually though never traded.

Based on its detailed report with 93 pages, the council has proposed a 42% tax on unrealized gains from assets acquired from the inception of Bitcoin in 2009.

• Tax Basis: That would treat those gains on these assets as sold each year on a tax basis, despite no actual trading has taken place. The tax rate proposed for this would be a high 42% on those unrealized gains.
• Tax Retroactivity: This new tax will reach all the crypto assets bought since January 2009, when Bitcoin came into existence.
• Implementation Timeline: The bill will be presented to the Danish Parliament in early 2025, upon enactment. It is expected to come into effect on January 1, 2026.
• Models Proposed as Alternative Taxation: The council proposed three alternative models of taxation to be used on crypto portfolios-inventory taxation, capital gains and warehouse taxation.
• Transparency Requirement: The proposed law requires collaboration from crypto exchanges to submit data on transaction records of Danish clients across EU countries.
• Wider Context: The bill in question is part of a worldwide movement; for instance, Italy is supposed to enhance capital gains tax equally as far as crypto assets are concerned, and even the U.S. has contemplated tax on undistributed assets.

Consequences for Crypto Investors

Reactions to the proposed tax on unrealized gains are mixed among investors and analysts. Mads Eberhardt, a senior crypto analyst at Steno Research, calls it a "war on crypto." He believes it would harm Denmark's investment landscape.

Taxing unrealized gains does not dissuade people from investing in digital assets but adds more compliance burden on the investor.

1. Compliance Issues: Forcing crypto service providers to report on client transactions may raise the compliance burden on businesses as well as individual investors.
2. Market Response: There were early discussions even about how the tax would impact market activity. People dread that it may lead to lower trading volumes or capital flight out of Denmark.
3. Macroeconomic Conditions: Denmark's move is also against the backdrop of increased scrutiny over regulations around the world. Other nations such as Italy are also adapting to the measures to enhance the gains tax regimes.

Global Taxation Policies:

Denmark's tax proposal appears to be in conjunction with the global regulatory shift that adheres to increased oversight towards digital assets. In an effort to impose taxation on the cryptocurrency, various countries are seeking to discover an appropriate approach:

• United Kingdom: Imposes capital gains tax, with a minimum exemption set at £12,000. Income tax ranges from 10% on earnings below £50,270 to 20% on higher values
• United States: To the contrary, capital gains are income-based taxation, while the basic exemption is $44,626 for any income level. The tax rates vary between short- and long-term capital gains: 10%-37% and 0%-20%, respectively.
• Australia: The minimum exemption limit is AUD 18,200. Short-term gains are taxed at slab rates and long-term gains are charged with a discount of slab rate by 50%.
• Netherlands: No capital gain tax; crypto-currency is charged on notional income at a similar rate to wealth tax. The exemption is available up to €57,000.
• Germany: Anything within a crypto wallet for more than a year is tax-free. Any income made under 600 in the calendar year is not taxed; any other kind of income such as mining is taxed.
• Canada: The tax arises on the sale of crypto, only when 50% of the capital gain of sales is taxable. Accumulating or acquiring cryptocurrency incurs no tax.
• India: The government has suggested a taxation of 30% on the transfer of digital assets with 1% TDS applicable to the transactions. No distinction between short-term and long-term gains.

Investment Scenario- Denmark:

A recent K33 Research and EY survey suggests that by 2034, Denmark's cryptocurrency owner number will reach 900,000. Right now, 20% of the respondents would be willing to invest in cryptocurrency in a decade, while 80% are uninterested.

Some 5% of prospective buyers would like to buy within the next year, most likely among current owners. Overseas exchanges are widely used in Denmark, with 40% using Coinbase as their primary channel to buy crypto. Only about 25% of investors use local exchanges, although local favourite Lunar tops the list. This indicates how highly Danish investors rely on global crypto marketplaces.

Benefits of the New Crypto Bill Introduced in Denmark

Benefits of the proposed crypto unrealized taxation model by Denmark include:

1. Consistency: It brings consistency in taxation for crypto assets with other financial contracts, and it rationalizes and reduces the level of complexity in the tax system.
2. Reduced administrative burden to Low-Frequency Traders: It removes associated administrative burdens on low-frequency traders to instead value their assets at the end of every year and not necessarily track single transactions.
3. Increased Accuracy in Reporting: It gives high accuracy in reported incomes since the frequent traders follow how the value of assets changes and do not necessarily follow each of the numerous transactions.
4. Loss Offset: Deals allow loss offsetting against other gains in the same category. Unused losses are carried forward to later years.
5. Encouragement of Long-Term Holding: The model could encourage investment by holding assets for longer durations by taxing those unrealized gains, though the structuring might be somewhat similar to what currently exists in financial instruments.
6. Integration within Financial Framework: It promotes integration of cryptocurrencies within the established monetary system thus elevating legitimacy and stability in the marketplace.

Conclusion

Denmark is going to introduce a trailblazing crypto bill that will tax unrealized gains in digital assets, effective from January 2026. This crypto taxation bill would put cryptocurrencies on the tax high street similar to traditional financial assets and establish tax stability. It simplifies for the occasional trader who does not need to track every transaction.

It enhances reporting for the high-frequency trader while allowing for offsetting losses against gains. Thus, this bill tries to increase the legitimacy and stability of the market, in all likelihood becoming a windfall for investors as well as the overall financial system by encouraging long-term holding and integration of crypto within existing financial regulations.