Latvian Lats: Currency History, Financial Use, and Tax Implications

The Latvian lats (LVL) was Latvia’s official currency until it was replaced by the euro in 2014. For decades, it played a key role in the economy as both a medium of exchange and a store of value. Though no longer in circulation, some individuals and businesses still hold lats in various forms.

Understanding what can be done with old lats today is important for financial and tax considerations. Whether exchanging them for euros, using them in transactions, or assessing their tax implications, knowing the relevant rules helps avoid complications.

Validity in Financial Transactions

The Latvian lats no longer has legal tender status and cannot be used for payments in Latvia. The Bank of Latvia officially withdrew it from circulation on January 1, 2014, making the euro the sole currency. Businesses, government agencies, and financial institutions are not required to accept lats, and any attempt to use them for purchases would be rejected.

Lats may still be referenced in older financial agreements. Contracts signed before the currency transition may include amounts in lats, and the official conversion rate of 0.702804 LVL to 1 EUR, set by the European Central Bank, remains the benchmark for determining equivalent euro values. This applies to long-term financial obligations such as loan agreements or deferred payments.

Private transactions between individuals are another scenario where lats might still be exchanged informally. While no longer recognized as currency, some collectors or nostalgic buyers may be willing to trade for them. However, these transactions carry risks, as the lats’ value is no longer backed by the central bank and is instead subject to market perception.

Exchange and Conversion Options

The Bank of Latvia is the only institution that facilitates the exchange of lats into euros. Unlike many discontinued currencies with strict conversion deadlines, the Latvian central bank offers an indefinite exchange period. Lats can be converted at the fixed rate of 0.702804 LVL to 1 EUR, ensuring holders can redeem them at any time.

To exchange lats, individuals must present physical banknotes and coins in person at the Bank of Latvia’s cash desk in Riga. Commercial banks and exchange bureaus no longer process these conversions. Mailing lats to the central bank is not an option, so those outside Latvia must travel personally or rely on intermediaries. This poses challenges for individuals who acquired lats before euro adoption and now live elsewhere.

Collectors and numismatists provide another way to convert lats into monetary value. Rare or historically significant banknotes and coins may sell for more than their official exchange rate, particularly limited-issue commemorative editions. Auctions and numismatic marketplaces offer platforms for such sales, though market demand and authenticity must be carefully assessed, as prices fluctuate based on rarity and condition.

Tax Treatment of Gains or Losses

Tax treatment of Latvian lats depends on how they are exchanged or sold. If converted to euros at the Bank of Latvia’s fixed rate, there is no realized gain or loss. However, selling lats to a third party at a different rate may create taxable income, depending on jurisdiction-specific rules.

For individuals, selling lats at a premium typically falls under capital gains tax regulations. In the European Union, capital gains tax rates vary by country. Germany taxes most private capital gains at 25%, while France applies rates ranging from 19% to 30%, depending on total income. In the United States, if lats were acquired as a personal holding and later sold for more than their equivalent value in local currency, the IRS would likely classify the difference as a capital gain, subject to short-term or long-term tax rates based on the holding period.

For businesses, lats held on balance sheets before euro adoption could result in foreign exchange gains or losses when converted. Under International Financial Reporting Standards (IFRS), IAS 21 The Effects of Changes in Foreign Exchange Rates governs foreign currency transactions. If a company recorded lats as monetary assets and later converted them, any resulting foreign exchange difference must be recognized in profit or loss. This applies even if the business originally accounted for lats under historical cost principles, as IFRS mandates revaluation at current exchange rates for monetary items.

Distinguishing Currency from Collectibles

Latvian lats exist in two forms: as former legal tender and as collectible items with numismatic value. This distinction affects financial and tax treatment, particularly for accounting and capital gains calculations. Unlike standard banknotes and coins, which are valued strictly by their exchange rate, collectible currency derives worth from scarcity, historical significance, or condition.

For taxation, many jurisdictions treat collectible currency differently than standard foreign exchange holdings. In the United States, the IRS classifies collectible coins under Section 408(m) of the Internal Revenue Code, subjecting them to a higher long-term capital gains tax rate of 28%, rather than the typical 0%, 15%, or 20% applied to other capital assets. This means that individuals selling rare lats at a premium may owe more in taxes than if they were exchanging standard banknotes. Similarly, in the United Kingdom, Her Majesty’s Revenue and Customs (HMRC) applies distinct tax treatment to currency classified as a collectible, which can affect inheritance tax calculations when passed down as part of an estate.

In accounting, collectible currency is often categorized as an investment or inventory rather than cash equivalents. Under IFRS, IAS 2 Inventories may apply if a business trades in collectible coins, requiring them to be measured at the lower of cost or net realizable value. If held for investment purposes, IAS 40 Investment Property or IFRS 9 Financial Instruments could be relevant, depending on how the asset is managed. The classification affects financial reporting, particularly in terms of fair value adjustments and impairment considerations.