Denmark’s Tax Law Council has recently stirred debate by proposing a mark-to-market taxation policy for cryptocurrency assets. This recommendation, aimed at eliminating tax discrepancies on crypto gains and losses, marks a significant shift in how digital assets will be regulated in Denmark. If the recommendations are adopted, it will bring continuous taxation on unrealized crypto gains and losses, an approach that could reshape the crypto landscape in Denmark.

What Is Mark-to-Market Taxation?

Mark-to-market taxation refers to levying taxes on the annual changes in the value of certain assets, regardless of whether they have been sold. For crypto investors in Denmark, this means paying taxes on their cryptocurrency holdings’ value increases year after year, even if they haven’t sold them.

This approach aims to close the loophole where crypto investors avoid taxation by holding onto their assets indefinitely, profiting from value increases without being taxed. The Tax Law Council noted that cryptocurrency’s decentralized nature has made it challenging to impose fair taxation, hence the need for a more structured framework.

The Council’s Recommendations: Closing the Loophole

According to the Tax Law Council, their recommendations will eliminate the “asymmetry” in the taxation of crypto gains and losses. Under the proposed plan, crypto holdings will be treated as capital income, and the mark-to-market taxation would ensure continuous tax reporting. This tax system is a response to the challenges posed by cryptocurrencies that aren’t regulated by traditional institutions like central banks.

The Council suggested that these new tax regulations should take effect no earlier than January 1, 2026, giving investors and crypto service providers time to adapt.

Timeline for Implementation and Reporting Requirements

The Danish government is expected to act swiftly on these recommendations. At the start of 2025, the Minister of Taxation plans to introduce a bill based on the council’s report. This bill would not only include mark-to-market taxation but also require crypto service providers to report client transactions, ensuring greater transparency in the crypto ecosystem.

This reporting requirement will hold exchanges and service providers accountable for sharing transactional data, enabling more efficient tax tracking. This marks an important step in Denmark’s efforts to regulate the digital asset space more comprehensively.

Impact on Danish Crypto Investors

If enacted, this taxation could dramatically affect Danish crypto investors. Senior crypto analyst Mads Eberhardt predicted that the tax rate on unrealized crypto gains could be as high as 42%. This applies not only to crypto assets acquired after the law takes effect but also to all assets dating back to Bitcoin’s inception in 2009. Eberhardt described the proposal as “a war on crypto,” signaling that investors may face substantial financial burdens from holding digital assets.

For many investors, the idea of paying taxes on assets they haven’t sold might seem unjust, particularly in a volatile market like cryptocurrency, where prices can swing wildly in short periods.

Global Context: Setting a Precedent?

Denmark’s move could set a precedent for other nations as governments worldwide seek ways to regulate cryptocurrencies more effectively. Countries like the U.S. and Canada are also exploring more robust crypto taxation policies, but Denmark’s proposal to tax unrealized gains stands out for its boldness. If successful, this model could inspire similar measures in other countries, fundamentally changing how digital assets are taxed globally.

Potential Market Reactions

While some crypto investors may see this as a negative development, others may argue that it brings much-needed structure and transparency to the cryptocurrency market. Increased regulation could reduce volatility and speculative trading, leading to a more stable market in the long run.

However, it is also possible that the legislation could push investors toward more decentralized and anonymous crypto assets to avoid taxation. Additionally, we might witness increased short-term trading to mitigate unrealized gains, which could lead to a more unpredictable market dynamic.

What Comes Next?

Crypto investors in Denmark will need to stay informed about the proposed changes and prepare for a shift in their tax obligations. As the law would not come into effect until at least 2026, there is still time for debate, lobbying, and adjustments to the proposed regulations.

As Denmark’s tax policy on cryptocurrency assets evolves, it will serve as a key example of how governments can approach the challenges posed by decentralized digital currencies. For now, the gloves are off, and it remains to be seen how the crypto community in Denmark will respond to this regulatory shift.