The global miners' base? Exploring the landscape of cryptocurrency taxation and regulation in Iceland

Author: FinTax

1. Introduction

Iceland, benefiting from its unique climate conditions and natural resource reserves, has gradually become one of the important cryptocurrency mining bases. The cold climate in Iceland provides excellent cooling conditions for mining machines, while its abundant and inexpensive electricity resources and stable, friendly political policies give it strong competitiveness in the cryptocurrency mining industry. As a haven for the cryptocurrency industry and a base for global miners, Iceland's tax system and regulatory dynamics regarding cryptocurrency are also noteworthy, and this article focuses on this theme.

2. The basic tax system of Iceland

2.1 Overview

Iceland has a relatively friendly tax environment and a relatively complete tax system. In recent years, the Icelandic government has focused on simplifying the tax system, lowering tax rates, and expanding the tax base in tax reforms, signing agreements to avoid double taxation with more than thirty countries including China, the United States, and the United Kingdom. Iceland also offers tax incentives to attract foreign investment, such as tax reductions, cash subsidies, training assistance, and land leasing. Iceland adopts a two-tier taxation system at the central and local levels. At the central level, taxpayers are required to pay corporate income tax, national personal income tax, value-added tax, environmental and resource taxes, customs duties, accommodation tax, and national broadcasting fees. At the local level, taxpayers need to pay municipal personal income tax, social insurance, municipal taxes, property tax, stamp duty, and inheritance tax. These taxes can be broadly classified into direct and indirect taxes, with indirect taxes being the main form of taxation in Iceland. Compared to other countries, the characteristics of Iceland's tax system are simple and effective, thereby enhancing the attractiveness of foreign capital and the international competitiveness of local enterprises.

2.2 Main Tax Types

2.2.1 Corporate Income Tax

All companies registered in Iceland are considered resident enterprises of Iceland. Foreign companies that establish branches in Iceland or effectively manage their operations in Iceland are also regarded as resident enterprises. Resident enterprises pay corporate income tax based on their net income. According to the official announcement "Tax Changes for 2025" (Skattabreytingar á árinu 2025) released by the Icelandic Tax Authority, the general tax rate applicable to joint-stock companies and limited liability companies is 20%, while a special tax rate of 37.6% applies to other entities such as partnerships and cooperatives.

2.2.2 Personal Income Tax

Any individual who stays in Iceland for more than 183 days in a 12-month period is considered a resident individual from the date of arrival and is fully liable for taxes on their worldwide income. Individuals who stay in Iceland temporarily for less than 183 days or less are non-resident individuals and are subject to national and municipal income tax on income derived from Iceland. Taxable income is salary minus pension fund premiums, and the personal income tax rate is progressive, as shown in the figure:

In addition, capital gains obtained by individuals not engaged in commercial activities (such as dividends and interest) are taxed separately at a rate of 22%. Each person is also entitled to a personal tax credit of 68,691 Icelandic krónur per month, which is deducted from the calculated tax amount, and non-resident individuals can enjoy the same expense deductions as resident individuals.

2.2.3 Value Added Tax

Value Added Tax (VAT) is an indirect consumption tax levied on all stages of domestic commercial transactions and on the import of goods and services. Companies or individual entrepreneurs, both domestic and foreign, that sell goods and services in Iceland must declare and pay VAT at a rate of 24% (standard rate) or 11% (reduced rate, applicable in certain scenarios). Taxpayers must complete the registration for business VAT, and upon registration, they will receive a VAT registration number and certificate. Notably, individuals and businesses that sell labor and services exempt from VAT, as well as those selling taxable goods and services at a price of 2,000,000 Icelandic króna or less within 12 months after starting business activities, are exempt from the obligation to register for VAT. Additionally, Iceland also has policies for reduced rates or full exemptions for a range of goods or services, such as those related to public transportation, healthcare, and the operation of schools and educational institutions, which are exempt from VAT.

2.2.4 Environmental and Resource Tax

Iceland's environmental and resource taxes include three types: fuel consumption tax, hydrocarbon tax, and electricity and heat consumption tax. The fuel consumption tax is levied on energy fuels. The hydrocarbon tax is imposed on liquid fossil fuels (i.e., natural gas, diesel, gasoline, aviation fuel, and LPG), and companies that obtain permits for hydrocarbon research or processing, as well as those directly or indirectly involved in hydrocarbon processing or distribution, must pay the processing tax and hydrocarbon tax. The electricity and heat consumption tax is a special tax collected at the sales stage from entities selling electricity or hot water. If the annual sales amount is below 500,000 Icelandic króna, it is tax-exempt.

3. Iceland Cryptocurrency Tax System

3.1 Overview of Cryptocurrency Taxation

Iceland has not yet established specific legal provisions specifically targeting cryptocurrency taxation, thus related issues are handled in accordance with the general provisions of Icelandic tax law. The definition of "income" in the Icelandic Income Tax Act is a broad concept, covering any gains that taxpayers obtain in any form and can be assessed in monetary terms, unless explicitly exempted by law. Therefore, the Icelandic tax authorities impose taxes on cryptocurrency assets. Moreover, according to the definition of tax residents in Iceland, both related enterprises, regardless of whether they are registered in Iceland, and related individuals, regardless of whether they are permanent residents, are subject to Icelandic tax law.

In different scenarios, the corresponding tax treatment varies depending on the nature of the transaction. For example, capital gains obtained by individuals from cryptocurrency trading are subject to capital gains tax at a rate of 22%, while profits from cryptocurrency for businesses are taxed at a corporate tax rate of 20%. Mining income is considered taxable income and falls under the category of business income, subject to the standard income tax rate. In this regard, the Icelandic tax authority points out that taxpayers mainly trigger tax obligations in two scenarios: first, when receiving cryptocurrency, such as through mining or when an employer uses cryptocurrency for wage payments; second, when exchanging cryptocurrency for other values, such as selling or consuming cryptocurrency.

3.2 Receiving Cryptocurrency

Mining: Mining is generally regarded as a business activity, and the mined cryptocurrencies are subject to corporate or personal income tax based on operating profits. Commercial mining is subject to cost deduction rules, allowing deductions for hardware depreciation, electricity costs, transaction fees, and other expenses. Individual, occasional, non-large-scale mining activities do not fall under commercial mining, and costs cannot be deducted; income from such activities is taxed as ordinary personal income. Additionally, Iceland has not temporarily imposed a special electricity tax on mining operations related to electricity consumption or environmental impact.

Cryptocurrency received as labor remuneration: When an employer pays wages in cryptocurrency, it must be converted into Icelandic króna at the market price on the date of payment and included in the individual's income, with taxes withheld and paid. The tax calculation is consistent with that of fiat currency wages and applies a progressive tax rate.

Gifted cryptocurrency: Gifted cryptocurrency can be tax-free if its value does not exceed the usual gift range, such as small gifts among friends and family.

3.3 Exchange cryptocurrency for other assets

When cryptocurrency is used to exchange other assets (goods, services, fiat currency, or other cryptocurrencies), it triggers a tax obligation. Common scenarios include selling cryptocurrency for fiat currency, exchanging between different cryptocurrencies, and using cryptocurrency to purchase goods or services. However, transferring cryptocurrency between different wallets by the same user does not require taxation as there is no actual value exchange.

Cryptocurrency transactions under this category are divided into two types: first, personal non-commercial transactions, which are subject to capital gains tax (22%); second, commercial transactions, which are subject to business profit tax. The distinguishing criteria between the two include the continuity of the trading behavior, profit intention, and independence, namely whether the trading frequency and scale are similar to business operations, whether the primary purpose is to earn price differences, and whether it is a self-initiated financial activity. Trading activities characterized by high-frequency trading or institutional investment will be classified as commercial transactions.

Regarding the specific calculation of capital gains, it follows the formula "Cryptocurrency Capital Gains = Transfer Value - Acquisition Cost - Deductible Expenses". Among them, the transfer value is based on the actual market price of the cryptocurrency at the time of the transaction; the acquisition cost is the purchase price plus transaction fees at the time of acquisition, and for mining acquisition, it is the market price at the time the cryptocurrency was generated; in deductible expenses, there is a loss offsetting rule, meaning that annual losses of the same type of cryptocurrency can offset gains (e.g., BTC losses can offset BTC profits), but cross-cryptocurrency offsetting is not allowed. Additionally, losses caused by lost private keys or stolen wallets are not considered deductible losses.

4. The Frontier and Development Trends of Cryptocurrency Regulation in Iceland

Currently, Iceland has not established specific laws for cryptocurrencies, but relies on the existing financial system for regulation, with the Financial Supervisory Authority (FME) and the Ministry of Finance implementing oversight of the crypto industry according to their existing responsibilities.

In 2018, Iceland introduced the "Virtual Currency Service Provider Rules," requiring cryptocurrency exchanges and wallet providers to register with the Financial Supervisory Authority and comply with Anti-Money Laundering (AML), Know Your Customer (KYC) regulations, and Counter-Terrorism Financing (CTF) regulations, establishing the basic regulatory framework for cryptocurrency operations in the country for the first time. In 2019, the Icelandic Financial Supervisory Authority approved the country's first cryptocurrency institution, Monerium, allowing it to provide blockchain-based electronic money services within the European Economic Area, which was seen as a significant breakthrough. In June 2023, the European Union officially released the "Regulation on Markets in Crypto-Assets" (MiCA), which will fully come into effect on December 30, 2024, and applies to European Economic Area countries, including Iceland. MiCA provides detailed regulations regarding the definition of crypto assets, the licensing of issuers and service providers, and operational management. As a signatory member, Iceland's cryptocurrency regulatory system is aligned with MiCA and is in line with EU standards, which will play a crucial role in the compliant development of cross-border cryptocurrency operations in Iceland in the future.

The energy consumption and environmental impact of cryptocurrency mining have gradually attracted the attention of the Icelandic government. In March 2024, the Prime Minister of Iceland expressed a desire to reduce the country's cryptocurrency mining activities during an interview. In light of this, it is expected that the country will shift its focus from cryptocurrency mining to the entire blockchain industry. Meanwhile, Iceland has also shown exploratory interest in central bank digital currencies (CBDCs). The central bank believes that CBDCs could be a viable alternative to traditional currency payment systems, with their feasibility depending on the specific design of the CBDC. Like many countries, Iceland's evaluation of CBDCs is still ongoing, and more institutional measures may be taken in this regard in the future.

5. Summary

Iceland has a relatively lenient and friendly attitude towards the regulation and supervision of cryptocurrencies, which has placed Iceland in an important position in the global cryptocurrency trading and mining market. Conversely, the cryptocurrency industry has brought significant investments to Iceland and even promoted the country's economic recovery following the 2008 bankruptcy crisis, playing a positive role in Iceland's economic development. The Icelandic government has been supportive of the development of the cryptocurrency economy in the country in recent years, with regulatory measures primarily focused on preventing illegal financial activities. On one hand, the government may continue to emphasize this focus in the future, strengthening international cooperation to combat financial crimes and promoting the healthy development of the cross-border cryptocurrency industry. On the other hand, the impact of cryptocurrency mining on the country's environment and resources has already attracted government attention, and in the path of upgrading or transforming related industries, Iceland may explore more, which also brings new opportunities and challenges for cryptocurrency enterprises.