Bitcoin & Co: Cryptic Tax Rules

by Stefan Rullktter, Euro on Sunday

Dhe providers of crypto assets stand for disruption and innovative strength according to their self-image. When it comes to tax issues, however, investors are often no better off with digital currencies than with conventional investments. Because anyone who trades with Bitcoin & Co and realizes profits must watch out for a variety of fiscal pitfalls:

Speculation period for direct investments

In principle, there is a speculation period of one year for cryptocurrencies in Germany. For tax purposes, they are classified as “another economic good”. Anyone who sells coins after this holding period will still receive tax-free profits. If the property is sold within twelve months, the tax-free limit for private sale transactions (600 euros) applies to profits. If the profit is just one euro higher, the personal tax rate (14 to 42 percent, depending on the taxable income) is due on the entire increase in value. If the taxable income is more than 277,826 euros (555,652 euros for jointly assessed persons), the tax office demands the so-called rich tax (rate: 45 percent) on a pro rata basis.

Cryptocurrency Exchange

Anyone who exchanges Bitcoin for other cryptocurrencies such as Ethereum or pays for a product with it triggers a “tax event”. If investors use their crypto shares for such purposes, these transactions fall under the category “private sale transactions” (see previous paragraph). Corresponding problems can also occur with crypto savings plans that work with indices from several digital currencies. Because their composition is constantly changing, investors must prove how long each individual currency has been in the portfolio in order to remain tax-correct. As a result, the investment risk is reduced, but it becomes more complicated for the tax return and more time-consuming for investors to document. All acquisition processes should therefore be meticulously recorded. Good tax software programs (see uro am Sonntag 6/22) can relieve investors of the documentation work here or at least provide them with effective support.

Flat fee for crypto funds

Anyone who invests in cryptocurrencies via fund products should also be aware of tax traps. Gains realized with ETFs that reflect the performance of Bitcoin & Co in the portfolio are subject to withholding tax, regardless of the holding period. The total burden of taxes including the solidarity surcharge (5.5 percent) and, if applicable, church tax (eight or nine percent) is 27.99 percent.

Crypto ETPs

For exchange-traded products (ETPs), in which cryptocurrencies are structurally deposited, the taxation is still unclear. Equal treatment to ETCs on commodities in which precious metals are physically deposited and which certify a delivery claim down to the gram is conceivable. Realized price gains could then also be tax-free for crypto ETPs after a minimum holding period of one year.

Calculation of crypto profits

In principle, the purchase price must be deducted from the sale price for the fiscal profit calculation. However, a clear legal regulation for crypto systems does not yet exist. Investors therefore have the choice between two options for calculating their profits. With the so-called FIFO method (“first in – first out”), coins that were bought first are also the first to be sold again. The counterpart to the FIFO method is the LIFO method (“last in – first out”). Here, the coins last purchased are considered to be the first to be sold again. Which of the two methods is more tax-efficient depends on the individual case. Tax offices tend to use the FIFO method.

Unresolved legal issues

Do profits from the sale of cryptocurrencies count as other income from private sales transactions within the meaning of the Income Tax Act and are therefore taxable? Or is it tax-free profits because cryptocurrencies are not intangible assets? This legal question has also not yet been finally clarified.

Also to be noted: Each cryptocurrency transaction triggers a “taxation event” individually and for itself. Anyone who makes further untaxed profits with untaxed Bitcoin earnings, for example, bears a high risk in the event that the price – as at the beginning of 2022 – falls sharply. Then investors are left with the tax liability from previous profits, even though they are in the red with the crypto asset on the sales date.

Test case without BFH ruling

Another legal question was dealt with in a test case that ended recently. A son had bought bitcoins for his father in trust with US dollars. He traded parts of the holdings directly, and used others to acquire additional cryptocurrencies on six trading platforms. Within a year he made a profit of 31,904 euros, which the tax office treated as “other income”. This means that exchanging or re-exchanging bitcoin into another cryptocurrency or into euros within one year of purchase is a private transaction and profits are taxed at the individual tax rate. The Baden-Wrttemberg Finance Court confirmed this legal opinion in 2021 and dismissed the investor’s claim (Az. 5 K 1996/19). The Federal Fiscal Court was originally supposed to make the final decision (Az. IX R 27/21). But the plaintiff withdrew the appeal a few days ago. This means that crypto investments remain in a gray area for tax purposes.

New tax rules expected

The Federal Ministry of Finance (BMF) wants to regulate the taxation of crypto assets via ordinance. The draft of a letter from the Federal Ministry of Finance, which was published last June, says: “The sale period is extended to ten years if units of a virtual currency are used as a source of income and income has been generated from this in at least one calendar year.” This legal change would also affect crypto ETPs.

Coordination between the BMF and the state finance ministries is in progress and the letter is to be published soon. At the same time, the traffic light coalition is aiming for further tax clarification. The FDP proposes equal treatment of cryptocurrencies with capital gains – and thus a fundamental change in the tax status as private sales transactions.

Underage crypto traders

Teenagers can also trigger a tax liability. “Parents should, as a precaution, discuss with their offspring whether they are buying or selling with ‘crypto money’ on the Internet,” says Christopher Arendt, a lawyer at Munich-based law firm Acconsis (see interview below).

Christopher Arendt, Attorney at Acconsis

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Image sources: Grasko / Shutterstock.com, Daniela Staerk / Shutterstock.com