Caution advised with crypto currencies - Bitcoin & Co. and their taxation law pitfalls
It is not only within the B2B sector that investments into token-based products become more and more popular. A growing number of private investors shows an active interest in profits from cryptocurrency trades - despite or potentially even because of their inherent high volatility. However, under certain circumstances investors may be obliged by taxation laws to declare their revenues to tax authorities. The authorities on the other hand may be entitled to tax these revenues. Investors not complying with their declaration or taxation obligations can potentially even face penal action.
Tax classification of crypto currencies
Under German tax law, cryptocurrencies do not go as a currency in its legal sense. While this might sound like a technicality, the very classification does lead to a different treatment of cryptocurrencies under tax law. The general notion is that profits from trading Bitcoin and other coins are treated like profits made from sales of private assets. Profits made from the purchase and resale of such a private asset get taxed, if the alienation of the assets takes place within the course of a year since its purchase, see § 23 No. 2 and § 23 para. 1 phrase 1 No. 2 Income Tax Act (EStG). The rate such profits are taxed with is determined by the personal income tax rate according to § 32a para. 1 Income Tax Act.
When it comes to private sales, § 23 para. 3 phrase 5 Income Tax Act throw in an exemption limit of 600 EUR per year. However, especially when it comes to active trading, exceeding this limit happens fairly quickly. If an investor exceeds the profit limit of 600 EUR within a year, not only any profit above the limit gets taxed, but all revenue made.
Tax authorities usually request a consistent line-up of all transactions made in order to be able to calculate the sales profit according to the so called Fifo method (first-in-first-out). In simple tax cases with only a few transactions, presenting consistent proof usually does not lead to problems. In an exemplary case, an investor purchased cryptocurrencies resembling a value of 1,000.00 EUR in February of a certain year and resold these coins a few months later for 1,500.00 EUR. These transactions would lead to a profit of 500.00 EUR and only two sales acts that need to be presented to the authorities.
Real world pitfalls
If an investor however did carry out numerous transactions, things become hard to comprehend easily. Here is a - still simple - example involving the purchase and sale of Bitcoin:
|
Amount |
Value per Bitcoin |
||
|
01 Jan 2021 |
Purchase |
0.5 |
25,000.00 € |
|
01 Feb 2021 |
Sale |
-0.4 |
27,000.00 € |
|
01 Mar 2021 |
Purchase |
0.6 |
38,000.00 € |
|
01 Apr 2021 |
Sale |
-0.3 |
49,000.00 € |
|
Profit determination per FiFo method |
||
|
Turnover on 01 Feb 2021 |
(0.4 x 27,000 €) |
10,800 € |
|
Invest made on 01 Jan 2021 |
(0.4 x 25,000 €) |
-10,000 € |
|
|
|
|
|
Turnover on 01 Apr 2021 |
(0.3 x 49,000 €) |
14,700 € |
|
Invest made on 01 Jan 2021 |
(0.1 x 25,000 €) |
-2,500 € |
|
Invest made on 01 Mar 2021 |
(0.2 x 38,000 €) |
-7,600 € |
|
|
Profit: |
5,400 € |
In theory, only income made and expenses done need to be counted against each other in order to determine the profit. In the real world however, drafting an orderly tabulation of the individual transactions often becomes an obstacle hard to come by already. On top of that, peculiarities of the Fifo method and the relevant points in time for the determination of the one-year period add up. Cases become even more complicated should the investor have exchanged different crypto currencies against each other.
Especially active traders risk getting classified as tradesmen before the law, § 15 Income Tax Act. When it comes to very exotic or volatile currencies on the other hand, one my object that the traded currency itself does not equal an economic asset under taxation laws.
With the tax authorities themselves there is another player in the field who not necessarily is equipped with all relevant knowledge about cryptocurrencies. A number of uncertainties remain in taxation offices that have not fully been resolved by higher courts, let alone the Federal Fiscal Court (s. Fiscal Court of Nuremburg, dec. of 8th April 2020, 3 V 1239/19).
So far, no Federal Court rulings have been passed, let alone published and no internal directions exist within the competent authorities. Hence - certainly when in doubt - issued tax statements containing cryptocurrency related stipulations should be checked against professionally.
Do you have any questions relating to crypto currencies and their treatment under tax laws? Or have you received a tax statement from your authorities already? We will be happy to give you advice! Please contact us by phone at +49 351 44753 0, by email at central@schaffrathlaw.de, or visit our website www.schaffrathlaw.de.
By your side
Schaffrath & Metzmacher Team
May 07, 2021
