The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 4): Germany
By Oliver Biernat, Benefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft
Trading or private activity?
Anyone who trades bitcoins as a private individual often does not suspect that one can exercise a trade with it. In order to avoid unpleasant surprises such as accusations of tax evasion and to limit possible additional payments, interest and penalties, it is necessary to have a tax expert check this in good time and collect receipts. The border between trade and private activity is blurred. Section 15(2) sentence 1 of the Income Tax Act regulates this:
“An independent, sustainable activity undertaken with the intention of making a profit and presented as a participation in general economic circulation is a commercial enterprise if the activity is not to be regarded as an agricultural, forestry, liberal profession or other independent work.”
- Independence should already be fulfilled if you operate your miner yourself with native Bitcoin clients or join forces with others in a mining pool.
- An activity is sustainable if it is designed for repetition, i.e. if further business is planned. So anyone who finds a block by chance because he runs a graphics card for test purposes is not being sustainable. If, on the other hand, you install multiple graphics cards in your server to mine permanently, you are acting sustainably.
- The participation in the general economic circulation will usually be given (i.e. an interaction with others takes place with the use of the bitcoins for paying or exchanging). Others think this is only the case if people offer their mining activities for a fee (i.e. they market the generated bitcoins themselves or make their computer capacity available for a charge).
- As a rule, it will, therefore, depend on whether the intention is to make a profit or it is a mere hobby, which is irrelevant from a tax point of view. The costs associated with mining or trading should also be taken into account when considering this issue. A trading business is present only if a total profit is expected to be achieved over its entire lifetime. The diffculty here is in estimating the turnover. Should initial losses occur, trading activity may still exist, and it should be taken care of that these are determined and carried forward by the tax offce so that they can later be offset against future profits.
If the requirements mentioned are met, trading activity will commonly exist in the case of mining and cloud mining. Some tax offces now suspect that mining is generally sustainable and therefore commercially operated due to the high initial investments.
But also with the bare trade in Bitcoins & CO, the private administration of assets can be exceeded fast in the case much is shifted, or you can make a living from it, maintain an offce furnished for it, or even use personnel for it. If there is a trading activity, private individuals or their tax advisors should register a trade with the responsible municipality and report the activity to the tax offce.
Value added tax treatment
Value added tax is to be applied, if any, only to entrepreneurs. The European Court of Justice had already ruled in 2015 that the sale of bitcoins falls under the tax exemption for foreign exchange under EU Law. However, since bitcoins are not considered to be a legal tender, uncertainty still prevailed.
On 27 February 2018, the Federal Ministry of Finance expressed its opinion and confirmed that when conventional currencies are exchanged for units of the socalled virtual currency bitcoin and vice-versa, it is a service for money within the meaning of Art.2 (1)(c) of the VAT system directive, which falls under the exemption under Art.135(1)(e) of the VAT system directive. This means in detail:
- The exchange of Bitcoin is a taxable service which is VAT-exempt according to Art.4(8)(b) UStG.
- The use of Bitcoin as a fee is not taxable
- When paying with Bitcoin, the conversion must be made at the last published selling rate (e.g. on corresponding conversion portals on the Internet). The performing contractor must document it.
- The services provided by miners are not VAT liable.
- If providers demand payment of fees for the digital wallets, other services within the meaning of Art.3a (5)(3) UStG are provided electronically, which are taxable in accordance with Art.3a (2) and (5) sentence 1 UStG, if the place of performance is in Germany (see also Art.3a.9a (1) to (8) UStAE).
- If the operator of a trading platform makes his website available to market participants as a technical marketplace for the acquisition or trading of Bitcoin, it is a matter of enabling purely EDP-technical settlement. A tax exemption, according to Art.4(8) UStG, is out of the question. However, if the operator of the platform purchases and sells Bitcoin as an intermediary in his own name, the tax exemption, according to Art.4(8)(b) UStG, is applicable.
- The exchange of virtual currencies for legal tender and vice-versa is exempt from VAT. This does not apply to virtual play money as this is not a means of payment in the sense of the VAT system.
Income tax treatment
a) Trading by private investors
Bitcoins are treated as intangible assets under Income Tax Law. If allocated to the private sector, private sales transactions exist in accordance with Art.23 EStG. The profit represents the difference between the sales price and acquisition costs. A sale also exists if cryptocurrencies are the means of payment, sold against the Euro, or exchanged into other cryptocurrencies via a trading platform. If Bitcoins & Co. were acquired at different dates and prices, the acquisition costs should be determined using the FIFO method. If possible, taxes can be saved by allocation to private assets. Capital gains of up to EUR 600 per calendar year remain tax-free. Gains over this value are taxable only if the period between acquisition and sale is less than a year. The investor’s individual tax rate applies instead of the final withholding tax rate. Those who use cryptocurrencies for long-term financial investment and do not often reallocate them can thus generate tax-free profits.
b) Mining by private investors
Private, occasional mining, classified as a hobby, is insignificant from a tax point of view. In the case of the sale of cryptocurrencies extracted within one year, there is also no private capital gain, as there was no acquisition, but own production.
c) Trading activity
Anyone who meets the above criteria and is classified as a trader has income from a business and must document all sales and expenses. This rule applies to both mining and trading in cryptocurrencies. In this case, profits are always taxable regardless of holding period and amount. Depending on the legal form, the Income Tax Law or the Corporation Tax Law is applicable. Proof of all expenses is to be collected and kept in an orderly manner. Gains or losses are the difference between operating income and operating expenses or, in the case of persons preparing a balance sheet, the difference between income and expenses.
Oliver BiernatBenefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, Germany
T: +49 69 256 227 60
Benefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft is a tax consultancy and public auditing company located in Frankfurt, which is widely recognised as the financial centre of Germany. Benefitax predominantly serves German entities of foreign multinational groups, mid-sized German companies with cross-border activities, and wealthy private individuals.
Oliver Biernat is Founder and Managing Partner of Benefitax. He is a German Chartered Accountant, Certified Tax Advisor and Specialist Advisor for International Taxation with more than 20 years of experience. Since 2008, he has chaired GGI’s International Taxation Practice Group (ITPG), increasing its size to more than 570 experts from 90 countries in the process.
Published: Spring 2019