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 letters should provide clarification (this article)

There have been a number of open questions regarding the taxation of cryptocurrencies so far. After all, there has been a BMF letter since 2018 on the sales tax treatment of cryptocurrencies. Now, another BMF letter will soon follow, which deals with income tax aspects in relation to cryptocurrencies and tokens. Although this letter is currently only available as a draft, its content is comprehensively informative. For example, the sale of cryptocurrencies should remain tax-free if their acquisition dates back more than one year. But if you use these cryptocurrencies for lending, for example, during this time, the speculative period is extended to ten years. Furthermore, the draft clarifies how to determine the time of buying and selling cryptocurrencies. In addition, the letter also deals with the tax consequences of the crypto currencies acquired by mining. But also the distinction between private and commercial handling of cryptocurrencies finds tax assessment.

Who wants to earn money with Bitcoins or other cryptocurrencies, had to expect so far in the taxation of the profits based on it with some uncertainties. Because the treatment of cryptocurrencies in the sense of the income tax law was so far only conditionally possible. For example, it was considered unclear to what extent Bitcoins and other cryptocurrencies should be regarded as actual foreign exchange, or whether they should rather be grouped under the collective term “other economic good” within the meaning of § 23 (1) sentence 1 number 2 EStG. This question alone has an enormous influence on taxation and thus on the amount of taxes incurred with cryptocurrencies. Only on the question of how to treat cryptocurrencies from a sales tax point of view, there was binding information by the Federal Ministry of Finance (BMF). Because the BMF published a letter in 2018 that clarified these questions. All other tax aspects, however, were awaiting clarification – so far.

A few years have passed since the BMF’s last contribution to the taxation of cryptocurrencies. But since June 2021, a new BMF letter has become known that is currently still in draft. In fact, it deals with the various aspects of the income tax treatment of cryptocurrencies and thus answers numerous previously open questions. One can therefore assume that the BMF letter based on this draft and hopefully soon published creates legal certainty in the taxation of cryptocurrencies.

However, we would like to note that the current draft is still incomplete. In the area of points 51 to 53, for example, there is no explanation of the cooperation and recording obligations to which taxpayers should be subject in connection with the taxation of cryptocurrencies and tokens.

In the following, we now go into the most important provisions on the taxation of cryptocurrencies that the draft of the BMF letter contains. Therefore, the extensive technical explanations about virtual currencies, such as cryptocurrencies in the BMF letter, are not taken into account in our considerations. But we assume that our interested readers already have this knowledge and now only expect clarifying answers from a tax point of view.

First of all, we would like to point out that cryptocurrencies can be classified as income in several ways. On the one hand, Bitcoins & Co. can represent income of a commercial nature. § 15 EStG is relevant here. Furthermore, taxpayers can also collect units of cryptocurrencies through non-self-employment. In addition, cryptocurrencies can be income from capital assets. Finally, with regard to cryptocurrencies, it is also possible that they lead to profits from private sales transactions or other income. We also use this structure in our explanations, which we immediately begin with their consideration as income from business operations.

3.1.1. Mining

If a commercial company operates mining, the units of cryptocurrencies generated are valued at the market price of the day of their acquisition. For this, you can set the average exchange rate, which you get from the corresponding rates of three different trading platforms for cryptocurrencies at this time. Alternatively, online course lists can also be used. However, if there is actually a fixed market price, this is valid here.

The same applies to other commercial activities using mining. Thus, the general criteria for the assessment of a commercial activity are also decisive for this. This means the sustainable, profit-oriented and own-account mining activity, in which one bears an entrepreneurial risk and participates in general economic traffic. Incidentally, the criterion of commercial activity is also fulfilled if several miners merge in a mining pool.

On this basis, the subsequent valuation of cryptocurrencies that are in the operating assets of a company takes place. Of course, this is subject to the respective taxation rules by accounting or by surplus income accounting.

3.1.2. sale of cryptocurrencies (trading)

If cryptocurrencies are in business assets, their sale leads to operating income. This sale process is also called new German trading. If there is a profit, it is of course taxable like all other operating profits. Here, too, the general requirements for taxation apply, such as the deduction of any acquisition costs.

3.1.3. Cryptocurrencies Received Due to a Fork

The draft of the BMF letter also deals with the question of how to tax cryptocurrencies resulting from a fork. Since a fork from a previous cryptocurrency creates a new cryptocurrency, it is important here whether the original currency units were already in the operating assets before the fork. Because of this, the units of the resulting crypto currency are then also assigned to the operating assets. The valuation of the acquisition costs of the new cryptocurrency units at the time of the fork is carried out by the previously mentioned methods for determining the market value. In any event, these new units also constitute new assets in the company assets.

It is interesting that this follows a similar regulation for the evaluation of crypto currencies generated by forks as in the USA. In the UK and Australia, however, such a situation is regulated in such a way that the new entities continue the values of the original cryptocurrencies from which they emerge.

3.1.4. issuance and acquisition of tokens

Depending on how you design a token as an issuer, the company balance sheet is also to be recognised as either equity or debt. For the issuer that creates tokens, these are in any case to be evaluated with the production costs.

Depending on the type of design of the token, purchasers of tokens must of course also observe the general valuation principles. In addition, in a transaction with tokens, one must pay attention to whether tokens comply with contractual obligations or are to be regarded as liabilities.

3.1.5. Staking of Cryptocurrencies

If staking takes place with cryptocurrencies that are in the operating assets, the transfer of the additional units earned by staking is considered to belong to the operating assets. Therefore, the value of the crypto currencies acquired by staking must also be determined using the methods for determining the price described in 3.1.1.

3.1.6. Lending of Cryptocurrencies

Interest or fees that a company receives from lending cryptocurrencies also accrues to operating assets. If the earnings are again cryptocurrencies, then the valuation at the time of access also takes place via the methods already described for determining the market price.

3.1.7. Airdrop of Cryptocurrencies

If a company receives free units of cryptocurrencies (so-called airdrops) as part of its activity, the accounting requirement for activation also applies here. Consequently, the described methods for determining the value are also used here. Thus, it is also true here that the value determined on the basis of the market price is decisive at the time of receipt.

Basically, only the cheaper or free transfer of tokens to employees comes into consideration. But you have to distinguish exactly whether the tokens provided are a monetary performance or a monetary advantage or a material reference. In the case of a reference in kind, one must also take into account all other conditions that are usually applied to references in kind. This includes, for example, that a monthly in-kind allowance of currently EUR 44 remains tax-free. The decisive factor here is when the employee’s wallet registers the receipt of the tokens. However, if an employee trades a token comparable to a short sale, i.e. a sale of the token that an employee is yet to receive, then the associated wage amounts to the amount corresponding to the sales proceeds of the tokens. This is then subject to regular taxation as wages.

Furthermore, tokens can be considered as income from capital assets. To this end, it must be clarified whether a token within the meaning of § 20 (1) no. 7 is to be regarded as a capital claim. If this condition exists, tokens represent current capital gains.

Now we come to the most interesting aspect for many readers, namely the taxation of cryptocurrencies in private sales transactions. The draft of the new BMF letter makes it clear that cryptocurrencies held in private assets are considered to be so-called other economic goods within the meaning of § 23 (1) no. 2 EStG. Thus, the taxation of cryptocurrencies applies the same rules as for all other economic goods of this type.

This also gives the possibility to offset any losses. However, you can only offset losses from the sale of a certain cryptocurrency with profits from the further sale of the same type of cryptocurrency. In addition, the general rule applies here that you can offset losses either in the same investment period, or with such profits from the previous year directly. Alternatively, a loss carry forward is also possible, so that the established loss reduces any future taxable profits.

3.4.1. One-year speculative period

On the one hand, the purchase and sale of units of a crypto currency is taxable within one year. However, if there is more than one year between the purchase and sale of units of a crypto currency, the resulting profit is tax-free. Any form of acquisition is considered an acquisition, for example also by exchange for other crypto currencies or tokens as well as by mining. In addition, the acquisition costs are also eligible for profit or loss determination.

In order to determine whether the one-year speculative period has expired, one must pay attention to the time of access of the units of the crypto currency into the wallet. In general, you have to determine exactly which unit of a crypto currency with its exact access date you want to sell at a certain time. Thus, you always have the free choice and can determine with what value you want to determine the profit or loss from a sale or whether you want to make the sale taxable.

On the other hand, it is also simplifyingly permissible to apply the first in first out principle (FiFo). As a result, the units of a crypto currency that are the longest in the private assets of taxpayers come into consideration first when selling.

Furthermore, taxpayers can determine separately for each own wallet and for each cryptocurrency in it, whether the individual consideration or the FiFo method should apply. However, a change of method within a wallet is only possible again if a wallet no longer contains units of a crypto currency, for which one now makes the purchase of new units.

When valuing cryptocurrencies in private assets, the time at which units of a crypto currency appear in the wallet as incoming and outgoing is also decisive. At these times, the corresponding market rate must be determined.

3.4.2. 10-year speculative period

Many affected taxpayers can certainly live with a speculative period of one year if this leads to tax-free income after the deadline. However, there are exceptions that extend the period to ten years. This also applies to an already existing legal norm, namely § 23 (1) no. 2 sentence 4 EStG. Thus, this norm now also determines that cryptocurrencies or tokens used to generate other income pass from the one-year to the ten-year speculative period. For example, this is the case when lending cryptocurrencies. So basically these secondary incomes are interest. But even in staking, where the comparison to interest income is inappropriate, units of a crypto currency serve to gain new units. That is why staking also leads to an extension of the speculative period to ten years.

However, if taxpayers use units of a cryptocurrency that they acquired through a single acquisition operation only partly for such purposes as a source of income, then the extension of the speculative period applies only to this part. For the remaining part, which is unused in private assets for over a year, you can make a tax-free sale.

3.4.3. Receipt and sale of cryptocurrencies received through a fork

A fork can also influence the taxation of cryptocurrencies in private assets. But basically, for units of a cryptocurrency obtained through a fork, the same rules apply that we have already described (evaluation, speculative periods). The only peculiarity here is that for a new cryptocurrency, for which one cannot yet apply any of the described valuation standards due to a lack of data, the value of the cryptocurrency corresponds to the initial cost of the cryptocurrency from which the new cryptocurrency emerged. By the way, the same applies to the acquisition time of the new crypto currency, although you could actually date this on the fork.

3.4.4. Receipt and sale of cryptocurrencies received by Airdrop

Units of a cryptocurrency or token, which one receives through an airdrop and which a taxpayer later sells, are of course also subject to taxation. The same rules apply here as for other private sales transactions of cryptocurrencies or tokens. The acquisition costs are thus also determined on the basis of the market rate, with the time of acquisition by Airdrop being decisive.

3.4.5. Tax Specifications of Tokens

When considering tokens in private assets, special rules should apply in the sense of the draft for the new BMF letter. However, as far as the taxation of privately sold tokens is concerned, the same rules apply here as for the sale of cryptocurrencies. In particular, it is also important to pay attention to whether taxpayers earn income by using tokens. This also includes crypto currencies. This also leads to an extension of the speculative period to ten years.

3.5.1. Staking

If taxpayers receive units of a cryptocurrency through staking for the operation of a masternode, this constitutes other income within the meaning of § 22 no. 3 EStG.

3.5.2. Lending

Also in the category of other income are those related to cryptocurrencies arising from lending. Here, too, it applies that income on cryptocurrencies by lending at the time of inflow is valued using the methods already described. Therefore, the market price of the crypto currency is also relevant here.

3.5.3. Airdrops

Another way to associate units on a cryptocurrency or token with other income is through airdrops. This can be compared to other income a quiz candidate receives in return for answering quiz questions correctly. As a rule, the receipt of airdrops also incurs consideration from the taxpayers who receive them, which usually consists in revealing data about themselves. Here, too, the market price at the time of receiving the airdrops is considered the initial cost for the associated cryptocurrencies or tokens.

A special feature may actually come into question in connection with airdrops. If you only receive airdrops because you only transmit the data required to transmit the cryptocurrencies or tokens, then this process is to be considered free of charge; After all, there is nothing in return. In this case, an airdrop can therefore in principle represent a donation. Therefore, one must pay attention to the extent to which a taxpayer receives airdrops from a source within ten years. Finally, even in such a case, the general allowances for inheritance tax and gift tax apply.

Anyone who generates cryptocurrencies through mining may have thought of the association with the fairy tale with the golden eel. Admittedly, the hay that the fairy tale hero needs for the upkeep of the gold donkey does not stand up to the electricity or other costs of mining. But it is also the same fairytale fascination in mining as values seem to emerge from nothing.

But at the latest when it comes to the taxation of cryptocurrencies, the ease of mining flees from the sometimes immense effort that has to be made to calculate the taxes. You can take some precautions beforehand to keep taxes as low as possible. In either case, one is usually dependent on the support of tax law firms experienced in this field. Of course, this also applies to all those who have to tax cryptocurrencies or tokens, where there is a different form of acquisition than mining. And the following should always be borne in mind: Just because it is complex to tax cryptocurrencies or tokens, this is still not a good reason to hide the profits from the Treasury and thus withhold the taxes. On the contrary. This is punishable as tax evasion.