date | theme

22. October 2018 | Taxation of Bitcoins and Cryptocurrencies

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

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

28. February 2022 | Sell cryptocurrency tax-free after lending (this contribution)

The sale of cryptocurrencies is in principle tax-free after one year. However, if you use a cryptocurrency in the meantime to earn income, for example through lending, and then want to sell within a speculative period of ten years, then you pay income tax. However, after at least three years after the acquisition, the crypto currency can be brought into a corporation. This is not a taxable sale, so it does not lead to taxation. But the valuation of the deposited cryptocurrency takes place as a realistic partial value. If you want to sell the cryptocurrency with which you had previously operated lending from the company assets, then book value and current sales value are practically the same. Therefore, there is no taxable profit on the balance sheet. In order to withdraw the profit from the company tax-free, one uses the fact that one has received a deposit into the tax deposit account for the transfer of the crypto currency into the company assets. However, the contents of this tax deposit account can be taken tax-free as a shareholder.

If you purchase a crypto currency as a speculative object, you can sell it on a rising price, so that you can finally make a profit. However, one can also earn money with cryptocurrencies in other ways. Because when lending cryptocurrencies, which is also described as lending, you can also charge interest or fees. However, the difference between selling a cryptocurrency for a profit, or between buying and selling it in another way with Bitcoins and his ilk, has tax implications. Because lending leads to the fact that you can only sell a crypto currency tax-free from private assets after a ten-year speculative period.

However, we now want to show how it can be designed that you can sell a crypto currency with which you have operated lending tax-free before the speculative period expires.

Before we go into the details of our design model, we would like to outline what legal and other regulations exist in this context. In particular, the basics for understanding why you can only sell a crypto currency tax-free after ten years, if you have previously operated lending with it, are important here. In addition, however, we also have to look into the legal regulations that affect the tax balance of a corporation. Because our design model can best be explained with a look at the balance sheet of a GmbH or entrepreneur company to be founded for our purposes (haftungsbeschränkt) (hereafter simply UG).

If you want to sell a crypto currency tax-free, you have to pay attention to the speculative period when lending. In principle, according to § 22 no. 2 EStG, the sale of another asset undefined according to § 23 (1) sentence 1 no. 2 EStG is possible tax-free from private assets after a period of one year. However, there is a restriction if you hold these so-called other assets in private assets and use them for profit between the acquisition and the sale. Lending of cryptocurrencies that is accompanied by remuneration is therefore also part of this. In such a case, a tax-free sale of such other assets is only possible after ten years (§ 23 (1) no. 2 sentence 4 EStG).

Now, however, the question of what a crypto currency is in the tax sense at all. Because if cryptocurrencies were equal to foreign exchange, they would do without a speculative period, since they would then fall under the taxation of capital income. In fact, a BMF letter still in draft makes it clear that cryptocurrencies are among the other economic goods. This classification can be found under point 39 of the draft.

Without going into the details of our design model presented here, we add a few comments on the legislation on discreet deposits in a limited liability company. A concealed insert is defined according to R 8.9 KStR. According to § 23 (1) sentence 5 no. 2 EStG, it leads in certain cases to classification as a sale. Thus, this would mean that the deposit of the crypto currency could also lead to taxation – without actually selling it. Fortunately, however, this rule only applies to real estate assets. However, since we are dealing here with other assets, there is no sale by way of the hidden deposit.

Dementsprend you have to book the deposit of a crypto currency on the balance sheet. Consequently, the relevant accounting rules apply. This is true even if the corporation wants to sell its cryptocurrency, regardless of whether lending has taken place before. Here, the partial value at the time of activation of the crypto currency in the balance sheet is considered to be decisive (§ 6 paragraph 1 no. 5 EStG). However, the sub-value of the deposit can only be used if the person making the deposit acquired the deposited item more than three years ago. If this period is not met, the balance sheet approach shall take place at the cost.

We now want to apply and use this in our design model. The higher the balance sheet approach of a deposit, the lower the rateable difference in value at the time of sale.

Let’s move forward. Suppose you have had a crypto currency in the private wallet for some time, with which you operate lending. If you now want to sell the crypto currency, then you also have to consider the speculation period. Because the interim lending has led to further income. The prerequisite for taxation would therefore actually be met.

That’s why we found either a GmbH or a UG in our model. Then we put the cryptocurrency into the corporation. Since this constitutes a hidden contribution under the Act but does not take place through the transfer to the company, the transfer remains tax-free despite prior lending.

The balance sheet consequence here is the activation of the crypto currency. On the liabilities side, this can be done as a capital reserve or as a profit carried forward. The relevant point here is that the booking on the liabilities side within the meaning of § 27 EStG is treated as a deposit into the tax deposit account of the shareholders. More on that in a moment.

The amount of the value with which the deposited crypto currency is activated is decisive here. According to § 6 (1) no. 5 EStG, this must be done either with the acquisition costs or with the partial value. However, if we wait three years after the private purchase of the crypto currency until we start the company, then we can use the partial value here to our advantage. And the partial value is still the value that the crypto currency would achieve at the time of deposit in free trade. So if its price has risen since the acquisition of the cryptocurrency, then the partial value that we set in the balance sheet is higher than the actual initial cost. In fact, by doing so, we circumvent the taxation of the difference between these values in several ways.

Now § 23 EStG enables us to sell tax-free by applying the current value ratios at the time of the hidden deposit. Because of the deposit of the crypto currency, we have now switched from personal tax liability as a private person to corporate tax. And a look at the balance sheet shows that the profit from the sale is just as high as the shareholder’s tax contribution, which he made shortly before. Thus, from a balance sheet perspective, no profit was generated by the sale. However, this is clearly due to the fact that the valuation of the contribution is based on the current value, but the actual increase in value took place before the transfer to the company. Since the actual increase in the value of the hidden deposit does not represent a sale, it has remained untaxed until this end – quite legally.

The last point is that you extract the profit from society even without taxes on a private level. And now the classification of the deposit as a deposit into the tax deposit account of the shareholders comes to the fore. Because shareholders of a corporation can have the contents of their tax deposit account paid tax-free.

For many, this tax design may seem questionable. After all, the legislature has introduced a speculative period for good reason. But the legal loophole used here is clear. Therefore, they can be used. At the same time, however, one must also assume that the legislator may close the legal gap at some point. In addition, in this design, one must also pay attention to details such as the costs of establishing the corporation or implementing such a project. Such an article can therefore at best be regarded as an idea. The implementation into reality may be a bit more complex.

At least this is a nice example of the creativity of our tax consultants who strive daily to reduce your taxes. After all, thanks to the countless legal and other legal requirements, we have to pay more or less taxes on a profit. So why pay more than is actually necessary?

If you also want such tax advice for your purposes, then you now have the opportunity to transition from a dream wish to an even better reality. You just need to call us. We are also happy to help you with tailor-made designs to reduce your taxes to a minimum. And in the best case, your income remains tax-free.