How are profits and losses from Bitcoin treated for tax purposes?
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 this perception.
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 profits tax-free.
Recently, the Federal Ministry of Finance published a letter comprehensively regulating the income tax treatment of virtual currencies and other tokens - or at least attempting to, as the legal situation is far from certain (BMF letter dated 10.5.2022, IV C 1 - S 2256/19/10003 :001).
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 exemption limit 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 their 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 exchanges into 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 the reference IX R 3/22. Therefore, the BMF letter is not yet the final word on the matter.
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.
(2022): How are profits and losses from Bitcoin treated for tax purposes?
How are profits and losses from gold sales treated for tax purposes?
Gold and silver have seen significant value changes in recent years. Many are considering selling their gold coins and bars to "cash in". But how are profits and losses from the sale of gold treated for tax purposes? The sale of coins and bars is considered a private sale transaction for tax purposes, and the 12-month holding period plays an important role (§ 23 para. 1 no. 2 EStG):
- For sales within 12 months of purchase, profits up to 600 Euro per year are tax-free. This is an exemption limit, not an allowance. Profits of 600 Euro or more are fully taxable as "other income" in accordance with § 22 no. 2 EStG at the individual tax rate. However, capital gains tax does not apply. Losses may only be offset against profits from private sales transactions, through loss offset in the same year and through loss deduction in the previous and/or following years.
- For sales after 12 months, profits are completely tax-free and losses are irrelevant for tax purposes.
The exemption limit means: A total profit of 599 Euro is completely tax-free, whereas a profit of 600 Euro or more is taxable from the first Euro. Profits from private sales transactions must be declared in the income tax return in "Anlage SO" on the reverse side. However, you are only obliged to submit this "Anlage SO" if your total profit or the total profit of your spouse from private sales transactions is at least 600 Euro.
The exemption limit of 600 Euro applies per person, provided each person makes the corresponding profits. It is not doubled for married couples. If purchases and sales are made through a joint marital account, the profits are attributed to both spouses equally (in "Anlage SO" in line 47). This way, the exemption limit is taken into account for each spouse.
There are bonds that entitle the holder to delivery of gold or another commodity and are backed by gold or another commodity in physical form. In Germany, this is particularly the XETRA-Gold bond from Deutsche Börse Commodities GmbH. The exciting question is how this bond is treated for tax purposes and whether it is subject to capital gains tax.
In 2015, the Federal Fiscal Court ruled that the profit from the sale or redemption of Xetra-Gold bearer bonds, which grant the holder a right to delivery of gold, is tax-free after the one-year holding period between the purchase and sale of the securities. As a result, the BFH equates the purchase and redemption or sale of the bond with the direct purchase or sale of physical gold (BFH rulings of 12.5.2015, VIII R 4/15, VIII R 35/14, VIII R 19/14).
Recently, the Federal Fiscal Court (in its ruling of 16.06.2020 (VIII R 7/17) continued its case law, according to which the sale of exchange-traded bearer bonds that entitle the holder to delivery of physical gold and reflect the current gold price does not constitute the taxable sale of a capital claim. According to the BFH, the profit made by the claimant from the sale of "Gold Bullion Securities" bearer bonds did not result in taxable income from capital assets within the meaning of § 20 para. 2 sentence 1 no. 7 EStG, as the bonds are not to be classified as other capital claims within the meaning of § 20 para. 1 no. 7 EStG.
(2022): How are profits and losses from gold sales treated for tax purposes?
