How are cryptocurrencies taxed?
Cryptocurrencies such as Bitcoin, Ethereum, or Litecoin are on the rise and increasingly establishing themselves as a means of payment, although many citizens probably view them more as speculative assets. Media reports of extreme value increases and drastic losses certainly contribute to their perception as speculative investments.
Be that as it may, when the tax authorities sense a source of income, in this case through the taxation of capital gains from the exchange of virtual currencies, they are keen to tap into it. Naturally, the holders of Bitcoin and similar currencies have a different view and wish to receive their profits tax-free.
The Federal Ministry of Finance has recently published a document that comprehensively regulates the income tax treatment of virtual currencies and other tokens – or at least aims to, as the legal situation is far from certain (BMF letter dated 10.5.2022).
The BMF letter addresses various crypto-related issues, providing technical explanations and income tax classifications. In addition to the buying and selling of Bitcoin or Ethereum, it particularly covers block creation (known as Bitcoin mining). The BMF letter also deals with staking, lending, hard forks, airdrops, the income tax specifics of utility and security tokens, and tokens as employee income. It would exceed the scope of this tax savings guide to delve into all the details of the current BMF letter. Therefore, only a few points will be highlighted:
- Cryptocurrencies can be the subject of a private sale transaction according to § 23 para. 1 no. 2 EStG. This means for transactions within private assets: Capital gains from the exchange or re-exchange of Bitcoins, etc., into euros or another cryptocurrency are considered taxable speculative transactions if the purchase and exchange occur within one year. A profit is only tax-free if it remains below the allowance of 600 EUR.
- For private individuals, the sale of acquired Bitcoin, etc., is tax-free after one year. The period is not extended to ten years, even if, for example, Bitcoins were previously used for lending or if taxpayers provided Ether to someone else as a stake for block creation.
- Transactions involving virtual currencies can also be attributed to business assets. This depends, among other things, on whether an activity is carried out sustainably, i.e., with a certain intensity. Block creation is sustainable if it is intended to be repeated.
- If units of a virtual currency or other tokens are repeatedly bought and sold (including exchanging them for units of other virtual currencies or other tokens), such trading may constitute a commercial activity.
- Block creation does not constitute private asset management. In both mining and forging, block creators receive block rewards and transaction fees in exchange for creating new blocks. The activity thus corresponds to the image of a service provider and is commercial.
- If units of a virtual currency or other tokens are business assets, the sales proceeds are business income, regardless of the one-year period that would apply to sales from private assets. When determining the capital gain, the individual – possibly continued – acquisition costs of the sold units of a virtual currency and other tokens must be deducted.
- Income from block creation that cannot be attributed to any other type of income may be taxable as a service under § 22 no. 3 EStG. This can be the case, for example, if there is no commercial activity due to a lack of sustainability. They are not subject to income tax if, together with other income from services, they amount to less than 256 EUR in the calendar year.
Recently, both the Baden-Württemberg Finance Court (judgment of 11.6.2021, 5 K 1996/19) and the Cologne Finance Court (judgment of 25.11.2021, 14 K 1178/20) supported the tax authorities' view regarding private sales of Bitcoins, etc. However, an appeal against the Cologne Finance Court's judgment is pending before the Federal Fiscal Court under case no. IX R 3/22.
Therefore, the BMF letter is not yet the final word on the subject. Furthermore, a supplementary letter on the cooperation and record-keeping obligations of taxpayers is already in progress. Here is the current BMF letter: Individual questions on the income tax treatment of virtual currencies and other tokens.
(2023): How are cryptocurrencies taxed?
