date | theme

22. October 2018 | Taxation of Bitcoins and Cryptocurrencies

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

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

17. December 2021 | Cryptocurrency and its taxation – so you can offset losses and earn income tax-free (this contribution)

Bitcoin and other cryptocurrencies are digitally represented units of value of currencies. This includes Litecoin and Rippel. This post covers cryptocurrency taxation, how to account for any losses and when to collect the income tax-free.

Bitcoin and other cryptocurrencies are digitally represented units of value of currencies. These are not issued or guaranteed by a central bank or other public body. In addition, they do not have the legal status of a currency or money. Nevertheless, natural or legal persons accept the units of value as a medium of exchange. They are transmitted, stored and traded electronically. Therefore, crypto currencies fall besides Bitcoin also Litecoin and Rippel. In the context of taxation, all cryptocurrencies are treated equally. Consequently, the regulations also apply to all cryptocurrencies.

You can earn income from Bitcoin or another cryptocurrency in different ways. Profits and losses can be made through trading. This means the mere constant purchase and sale of Bitcoins and other cryptocurrencies.

Another type of acquisition is the so-called mining. Mining is a process in which computing power is made available for transaction processing. So new Bitcoins are created. The miner will then be spoken to units of cryptocurrency to a certain extent. He can therefore resell them and thus generate profits.

Mining represents an acquisition process. Revenue in this case is the units of cryptocurrency received by manufacturing, but also the transaction fees that the taxpayer receives from other network participants for creation. Depending on the circumstances of the individual case, this can be private asset management or a commercial activity. In the following, therefore, a distinction must be made between commercial income and income from private asset management.

2.1.1. Commercial income

The income can already be classified as income from business operations by virtue of legal form, for example, if it is generated by means of a partnership or a Bitcoin GmbH. Otherwise, classification as a commercial activity depends on the requirements of § 15 II EStG. Accordingly, commercial activities are carried out by those who operate sustainably for their own account and who also bear the entrepreneurial risk for the activity. As a rule, therefore, the taxable person must be considered to be acting on a commercial basis. The miner participates in general economic traffic by leaving his Bitcoin to other network participants. However, in the case of particularly high costs for the purchase of hardware and high energy costs for the operation of the hardware, the profit intention can be questionable. Basically, however, it is assumed that mining in the long term is suitable for making a profit. In order to accept hobby, therefore, further circumstances must be added.

Units of a virtual currency are unusable assets. These are to be allocated to either fixed assets or current assets. It shall be reported in fixed assets under financial assets and in current assets under other assets. The acquisition costs for the hardware and energy costs can of course be deducted as operating expenses.

The newly created units are set at the market price at the time of purchase. On subsequent balance sheet dates, a partial write-down may be made if the partial value is expected to fall below cost on a permanent basis.

2.1.2. private asset management activity

In individual cases, however, the basic classification as a commercial activity can also be deviated from. Then there is mere private asset management. This is assessed according to the general principles of income tax law. Accordingly, mere asset management is to be presumed if the activity is only the use of assets in the sense of a fruition from material values to be obtained and the use of substantial assets by reallocation does not come into decisive focus. Then the income from mining is taxable according to § 22 no. 3 EStG. According to § 8 (3) sentence 1 EStG, the units acquired are to be set at the market rate at the time of purchase. As advertising costs, for example, expenses for the purchase of the necessary hardware and software can be taken into account.

In the context of trading, a distinction must be made between business assets and private assets. If the Bitcoin is operating assets, the sales proceeds are operating income. At the time of disposal, the individual cost shall be deducted. If the individual actual cost cannot be determined on a case-by-case basis, the average cost may be used.

The distinction between commercial activity and private asset management is problematic. For this purpose, the criteria for commercial securities and foreign exchange trading can be used. Therefore, the commercial activity presupposes that the taxable person acts as a merchant or bank-type and maintains a business established in a commercial manner. However, this is not yet justified solely by the purchase and sale on a significant scale.

2.2.2. Cryptocurrency in private assets

If the Bitcoin is held in private assets, it is to be regarded as another economic good within the meaning of § 23 (1) sentence 1 number 2 EStG. Profits from the sale of Bitcoin are therefore income from private sales transactions pursuant to § 22 no. 2 EStG in conjunction with § 23 (1) sentence 1 no. 2 EStG. The requirement for taxation is therefore that the period between sale and acquisition does not exceed one year. An acquisition process and sale process is to be seen as the exchange. The divestment period begins anew after each exchange.

For the determination of the deadline, the taxpayer can choose between the individual case and the deadline in the first out method (FiFo method). In the case of the individual case method, the acquisition time and the disposal time are decisive, which results from the wallet. The wallet is similar to a bank account. This allows the cryptocurrency to be received, stored and sent. If the obligation transaction under contract, i.e. the time of the exchange contract, is to be decisive, the taxable person must prove the time by suitable documents. For reasons of simplification, the taxpayer can also apply the deadline in first out method. Accordingly, it is to be assumed that the first acquired share of a Bitcoin was also first sold. Here you can of course make certain arrangements in order to get into the tax exemption due to the exceeding of the holding period. Therefore, you should calculate exactly which method is best for the one.

Nevertheless, the chosen method is to be applied to each individual wallet and maintained until the complete sale of the units of a virtual wallet. Only after the complete sale can the method be changed again.

The gain or loss on the sale of units of a virtual currency is determined by the proceeds of the sale minus the acquisition costs or the advertising costs. The transaction fees used shall be taken into account as advertising costs. The income from the sale remains tax-free according to § 23(3) sentence 5 EStG if the sum of all private sales transactions in the calendar year is less than EUR 600. Not only the income from trading, but also those from real estate trading or other private sales transactions must be considered.

The holding period may be extended to 10 years in accordance with § 23 (1) sentence 1 number 2 sentence 3 EStG. This is the case if Bitcoin is used as a source of income. This applies, for example, if the Bitcoin was left in the way of lending against payment (i.e. rented).

The regular tax rate obtained as part of the progression also applies. However, the basic allowance must also be observed. It is EUR 9,744 for 2021 and EUR 9,984 for 2022. Therefore, underlying income is not subject to taxation. Of course, other income from the other types of income must also be taken into account.

Bitcoin in particular is very volatile this year. Losses are therefore conceivable. If the losses result from a crypto currency that was previously held for a year, the losses are also not taken into account. Something else only applies if the holding period of one year has been undercut. Then you can count the loss in the year. The remaining loss can be carried back a year or carried forward. If you get below EUR 600, you will have to pay a tax on the income from the cryptocurrency if you hold it in private assets.