Tax treatment of cryptocurrencies such as Bitcoins in Germany
By Oliver Biernat, Benefitax GmbH
The rapid rise in the price of bitcoin and other crypto currencies has attracted a great deal of media attention. The blockchain technology is regarded by many as trend-setting. In recent years, an increasing number of people have traded, exchanged or paid with cryptocurrencies. Mining blocks is not only carried out by large investors but also by IT-affne private individuals. This raises several questions. On the one hand, the question of whether a trading or private activity exists and, on the other hand, whether and, if so, how profits and sales are taxed.
Tax risks in connection with the trading or mining of cryptocurrencies
The German tax offces usually assume that profits are taxable. Not declaring profits from trading or mining Oliver Biernat cryptographic currencies may be tax evasion. As it is known that many Bitcoin investors have made substantial profits, the tax authorities could make collective requests to the trading platforms to obtain information about the traders and their profits. In the U.S., it has already been reported that a well-known trading platform has issued 13,000 records concerning bitcoin investors to the Internal Revenue Service (IRS).
Trading or private activity?
For registered traders and corporations trading or mining in cryptocurrencies, all transactions are commercial and must be declared. Anyone who trades Bitcoins as a private individual often does not suspect that he can exercise a trade with it. 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 acting sustainably. If, on the other hand, you install countless graphics cards in your server in order to mine permanently, you are acting sustainably.
- The participation in the general economic circulation will usually be given, e.g. if the use of the Bitcoins for paying or exchanging an interaction with other persons takes place.
- As a rule, it will therefore depend on whether the intention is to make a profit or whether 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. The diffculty is to estimate the turnover, since the prices of the cryptocurrencies fluctuate strongly.
If the above-mentioned requirements are met, a trading activity will generally exist in the case of mining and cloud mining. 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 at all, only to entrepreneurs. The ECJ already ruled in 2015 that sales of Bitcoins fall under the tax exemption for foreign exchange under EU law. However, since bitcoins are not considered legal tender, uncertainty still prevailed.
On 27 February 2018, the German Federal Ministry of Finance expressed its opinion and confirmed that when conventional currencies are exchanged for units of the so-called virtual currency bitcoin and vice versa, this is a service which falls under the exemption of Article 135(1)(e) of the VAT system directive, i.e.:
- The exchange of Bitcoin is VAT-exempt.
- The use of Bitcoin as a fee is not taxable
- The services provided by miners are not VAT liable.
- If providers demand payment of fees for the digital wallets, these services are taxable if the place of performance is in Germany.
- 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 a tax exemption according to § 4 No. 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 § 4 No. 8 letter 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.
Income tax treatment
a) Trading by private investors
Bitcoins are treated as intangible assets under income tax law. If these are sold, private capital gains may occur. A sale also exists if cryptocurrencies are used as 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 FIFO method must be used. Capital gains of up to EUR 600 per calendar year remain tax-free. Capital gains in excess of this are only taxable if the period between acquisition and sale is less than one year. The investor's individual tax rate applies and not the final withholding tax rate.
b) Mining by private investors
Private, occasional mining can be classified as a hobby that is insignificant from a tax point of view. In the case of the sale of cryptocurrencies that have been extracted within one year, there is also no private capital gains, 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 applies to both mining and trading in cryptocurrencies. In this case, profits are always taxable regardless of holding period and amount.
Further information can be found at www.benefitax.de.
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: May 2018 l Photo: weedezign - Fotolia.com