date | theme

22. October 2018 | Taxation of Bitcoins and Cryptocurrencies

29. January 2019 | Bitcoins & Cryptocurrencies: Moving Abroad Enables Tax-Free Sale

18. June 2020 | Video: Cryptocurrencies & Bitcoins: Taxation of Trading / Lending / Mining & Cloud Mining

25. August 2021 | New rules for the taxation of Bitcoins & Co. – BMF letter to create clarification

September 3, 2021 | Bitcoin GmbH – which legal form is the best for tax purposes? (this contribution)

Entrepreneurs who want to make a profit from Bitcoins and other cryptocurrencies can tackle this in different ways. The choice of legal form is crucial. In particular, a Bitcoin GmbH offers many tax and other advantages. On the one hand, you can reinvest a large part of the profit with a Bitcoin GmbH. If you also run another company, then you can make a clean separation of business activities in the balance sheet. This is relevant because accounting with cryptocurrencies is quite complex. In this context, the establishment of a holding company also makes sense. With a larger business scope, however, the establishment of a company in tax-free abroad may also come into question. But there is also a tax-free alternative to Bitcoin GmbH in Germany, namely the tax-free private sale after the expiration of a one-year speculative period.

Anyone who merely buys and sells Bitcoins or other cryptocurrencies that are in private assets, while complying with a one-year speculative period, benefits from the fact that this is tax-free. However, this represents a commercial activity from a certain volume. Consequently, these profits are taxed, as with other commercial enterprises. The same applies, of course, to the use of other possibilities by means of which one intends to achieve profits with cryptocurrencies (for example mining, lending).

As with all companies, the legal form plays a prominent role in taxation. At first glance, the taxation of a company whose priority activity is related to Bitcoins or other cryptocurrencies may hardly differ from other companies of the same legal form. However, a look at detail can also be illuminating here. For this reason, we have chosen a topic for this article that ideally complements our previous contributions on the taxation of cryptocurrencies. Now we investigate in which situation which legal form or corporate structure is advantageous.

In order to achieve this, we assume that the regulations discussed recently in a published draft of the Federal Ministry of Finance will actually become valid in the future. In addition, we ignore aspects related to sales tax in order to focus entirely on income taxation.

First of all, the initial situation is the intention to make profits with Bitcoins and other cryptocurrencies that reach the framework of the commercial. Regardless of whether one would otherwise obtain tax-free or taxable income as a private person, this is the trigger that requires income taxation according to § 15 EStG. In addition, we assume that the cryptocurrencies company we are discussing should be based in Germany. After all, our contribution is primarily concerned with the taxation of companies based in Germany and thus with German tax law. Afterwards, however, we also ask ourselves whether a relocation of business activities abroad can make sense in order to save taxes. Finally, it may be possible to make the company tax-free.

In doing so, we hypothesize that Bitcoin GmbH is in fact usually the best form of company to do business with cryptocurrencies. We first support this with well-founded arguments. At the same time, we also inform you if and when a holding company can make sense here. We then test our hypothesis by discussing the tax conditions that a sole proprietorship or partnership has. In this way, we compare Bitcoin GmbH with its possible alternatives, so that you are able to recognize the relevant advantages of the appropriate legal form.

As with any comparison to the taxation of a company, the analysis of a company operating in Bitcoins or other cryptocurrencies ultimately depends on the amount of tax paid by the natural person behind it. We would therefore like to start by referring to our general description of this context. Of course, the same factors play a role at a Bitcoin GmbH as at any other GmbH, such as the tax deduction of appropriate managing director salaries or the flat-rate taxation of dividends with 25% capital gains tax as well as the partial income procedure as an alternative to this.

However you choose these parameters, the GmbH is generally only tax-advantageous from an annual profit of about EUR 60,000. But a Bitcoin GmbH also offers other advantages.

As the name suggests: a Bitcoin GmbH is simply a limited liability company. Therefore, in an emergency, it can prevent potential creditors from accessing the private assets of a shareholder. It is therefore a good legal form when it comes to asset protection. However, this is only the case if the Bitcoin GmbH itself has only a relatively small asset. However, if it also accrues the profits instead of distributing them to its shareholders, then this property is also affected by a possible claim to cover claims of third parties.

But you have to take into account that a Bitcoin GmbH primarily reinvests its profits on an ongoing basis anyway and thus keeps its related assets both permanently in the operating assets and constantly increases. So why do we bother to explain to you something that can hardly be handled differently anyway? The answer to this is that we make this statement with regard to all those entrepreneurs who already run a conventional operating GmbH and who would like to invest their profits in Bitcoins and other cryptocurrencies instead of distributing them. Here an independent Bitcoin GmbH makes sense, of course. However, one should avoid that the investment sums are only subject to taxation at the shareholder level before they are available to the Bitcoin GmbH.

Therefore, a holding company that serves only asset management is an ideal solution. After deduction of corporate tax and business tax, about 70% of the operating company’s gross profit remains to invest in the cryptocurrency business.

Nevertheless, there may be a good reason to found an independent Bitcoin GmbH as a subsidiary of the holding company. Because the financial accounting in the Bitcoin industry is so complex due to the fact that you have to document the receipt and expenditure of each Bitcoin very precisely, that foreign facts tend to be a hindrance in the preparation of the balance sheets. Therefore, especially with larger transaction volumes, the establishment of an independent Bitcoin GmbH is recommended.

Now we look at the possible alternatives to Bitcoin GmbH. This can be called individual companies on the one hand and partnerships on the other. However, as long as the scope is still below the threshold of the commercial, another alternative may also be advantageous. By this we mean the private trade in cryptocurrencies.

Anyone who operates a business based on cryptocurrencies as a sole proprietor must expect two special features compared to a Bitcoin GmbH. On the one hand, the taxation of profits should be mentioned in particular. On the other hand, there is a risk of private liability.

In this case, the taxation of a sole proprietor is based on the personal tax rate. If the profits are relatively low – we expect a taxable total income of less than EUR 60,000 – then the sole proprietorship may be tax-paying compared to the Bitcoin GmbH, because then the effective tax rate is lower. However, as soon as we expect a significantly higher amount, the ratio is reversed, so that the Bitcoin GmbH is the cheaper alternative for tax purposes.

Furthermore, one must also consider the private liability of a sole proprietor. If a situation arises that leads to a liability of the sole proprietor, then all assets are affected. A delimitation for securing individual asset areas is thus excluded. If you want to avoid this absolutely, there is no way around the Bitcoin GmbH.

Finally, we want to point out briefly that as a private person you may unintentionally become a sole proprietor with regard to trading in cryptocurrencies. The answer to the question whether this activity is a commercial activity is decisive. But in this regard, we refer to the next section 4.3., in which we discuss this aspect in more detail.

It is similar when we consider a partnership as an alternative to Bitcoin GmbH. Here, too, it is the personal tax rate of the shareholders that decides whether taxation on a private level is more advantageous or whether the Bitcoin GmbH offers better tax conditions.

Another advantage that Bitcoin-GmbH has over partnerships is the possibility of saving profits. This allows a higher share of the current profit to flow into the reinvestment. In the case of a partnership, on the other hand, a direct distribution of profits to the shareholders takes place on a regular basis, so that less money is available for reinvestment. In fact, there is also a way for partnerships to save profits. This is a new regulation introduced by § 1a KStG to replace an older option that is hardly used in practice due to its complexity. Although the new corporate tax option for partnerships is in fact much more application-friendly than its predecessor, it remains to be seen whether it will actually find widespread acceptance.

And now a few words about liability risk. Depending on the nature of a partnership in the specific individual case and the position a shareholder occupies in it, a private liability of the shareholder may well pose a risk. In an OHG, there can in principle be no exclusion from the liability risk. In a limited partnership, on the other hand, it depends on whether a shareholder is a general partner or a limited partner. Thus, a general partner is always liable with his entire assets. A limited partnership, on the other hand, may limit its liability to its commercial deposit.

This paragraph applies expressly only if a GmbH shareholder wishes to use the profits of his operating company optimally privately for trading in cryptocurrencies, but remains below the threshold of a commercial activity. However, the latter point could quickly lead to disputes with the financial administration, because the limits of commerciality are not defined by law. Thus, in borderline cases, different views can arise as to whether trading in cryptocurrencies is still of a purely private nature or already a commercial activity.

The legal view of commercial activities in general assumes that an independent and thus self-responsible economic activity leads sustainably to the purpose of making a profit. The activity takes place in general economic exchange. If this also requires a business operation to organize this activity, then at least one important condition that justifies a commercial activity is fulfilled. And this can happen quite quickly due to the complex requirements for calculating the taxable profit.

Let us now assume that the private activity does not constitute a commercial activity. In this case, this may even be the preferred alternative to trading cryptocurrencies. In contrast to Bitcoin GmbH, under certain conditions – compliance with the one-year speculative period – there is the prospect that these revenues will remain completely tax-free. The question here is how to use the profit of the operative GmbH or the holding company located above it with as little tax as possible for the private purchase of the cryptocurrencies. The solution to the problem is basically quite simple. For this, it is best to use a loan that the GmbH or the holding company makes available to its shareholder.

One last aspect remains, which we would like to discuss briefly in this context. So we now want to investigate the question of whether the establishment of a company abroad can represent a possible alternative to the domestic Bitcoin GmbH. After all, there are certainly countries and other tax regimes in the world that manage without a taxation of Bitcoins and other cryptocurrencies, or even knows no income taxes at all.

In fact, such a foreign company can be an interesting alternative to a German Bitcoin GmbH, but this is always associated with a certain effort in the initial phase, so that an implementation of this consideration is only worthwhile from a certain size. After all, one would like to ensure in advance that this form of tax structure is also legally secure. Therefore, one should seek the advice of an experienced tax specialist with the necessary expertise both with regard to the taxation of cryptocurrencies and in international tax law.