Cryptocurrencies such as Bitcoin, Ether, Litecoin etc. are increasingly influencing business models of companies. Bitcoin Miners Hasrate is well equipped with materials that will further develpe your understanding of the Cryptocurrency legal frame work. These companies also have to deal with taxation. Here you will find an overview of the tax treatment of virtual currencies and tokens. We present the most important points to you.
News: Capital gains on cryptocurrencies are taxable
In a recent judgment of February 14, 2023 (Az: IX R 3/22), the Federal Fiscal Court (BFH) decided that capital gains that a taxpayer could generate within one year from the sale or exchange of virtual currencies (currency tokens, payment tokens) achieved are subject to taxation as a private sale transaction .
In the present case, the taxpayer (plaintiff) had bought, exchanged and resold various cryptocurrencies. In detail, these were transactions with Bitcoins, Ethereum and Monero, which the taxpayer carried out privately. In the year of the dispute, 2017, he made a profit totaling 3.4 million euros. The tax office had subjected the profit from the sale and exchange of cryptocurrencies to income tax.
The BFH has now confirmed this: cryptocurrencies are so-called “other” assets that are subject to taxation as a private sales transaction if they are purchased and sold within one year.
Overview: what is it about?
The market for digital means of payment is growing strongly, albeit with sometimes large fluctuations. Politicians and financial authorities have also taken a look at digital currencies.
Companies that use and work with cryptocurrencies must above all consider possible income tax and sales tax consequences.
The Federal Ministry of Finance (BMF) issued a statement on sales tax in 2018 (letter dated February 27, 2018). According to this – in line with the case law of the European Court of Justice – cryptocurrencies are equated with conventional means of payment for sales tax purposes, insofar as they serve purely as a means of payment.
The income tax classification, on the other hand, has so far been very controversial. In the first supreme court decision of February 14, 2023, the BFH clarified that profits from the sale of cryptocurrencies are taxable under certain conditions. On May 10, 2022, the Federal Ministry of Finance (BMF) published a final letter on the income tax treatment of virtual currencies and tokens. The opinion of the BMF on the income tax treatment of private assets (margin no. 53 et seq.) is now confirmed in this respect by the BFH decision of February 14, 2023.
What are digital or virtual currencies?
- The financial administration describes digital or virtual currencies as digitally represented units of value of currencies that are not issued or guaranteed by any central bank or public body .
- The denominations of virtual currencies can be accepted by natural or legal persons as a means of exchange , even without the legal status of a currency.
- The most well-known virtual currencies include, for example, Bitcoin , Ether, Litecoin and Ripple.
What are tokens?
Tokens are digital units of value that can embody claims or rights. They can serve as payment for services provided in the network or be allocated centrally by a project initiator independently of the provision of computer power. When this happens for the first time, it is called an Initial Coin Offering. Some start-ups use this method to collect capital and thus finance themselves.
Blockchain is an important technology for digitizing the economy and society. It is at the heart of all cryptocurrencies.
- A blockchain is a multi-participant database with no central control that uses distributed ledger technology .
- It is designed so that the inventory is tamper-proof and immutable, only allowing additions.
- In the context of a virtual currency, a blockchain is a decentralized database in which all confirmed transactions are recorded, comparable to a decentralized ledger.
Proof of Work (Mining)
Mining is a process in which computing power is made available for transaction processing (block creation) . Units of virtual currency are allocated to the successful miner who created the block. This process is referred to as mining, based on gold digging.
The wallet (translated purse, wallet, purse) is an application for creating, managing and storing private and public keys. In order to carry out a transaction of units of a virtual currency, each user needs a wallet. As a rule, a separate wallet is required for each virtual currency, since the public keys depend on the underlying blockchain.
Initial Coin Offering (ICO)
The term Initial Coin Offering is based on the English term Initial Public Offering (IPO), i.e. IPO. While an IPO involves the sale of shares, an ICO involves issuing tokens in exchange for units of virtual or government currency. As with an IPO, capital is collected with an ICO.
Proof of Stake (Forging)
In contrast to mining, proof of stake is also referred to as forging or minting, i.e. forging or embossing, sometimes also generally as staking.
Fork (hard fork)
Fork means forking or splitting of a virtual currency. This can happen when the rules underlying a blockchain are changed.
With lending, units of a virtual currency are made available for use in exchange for a fee, in order to thereby generate additional units of a virtual currency.
In an airdrop, units of virtual currency or tokens are distributed “free of charge”.
Income tax classification
When it comes to the income tax treatment of income from cryptocurrencies, a distinction must be made as to whether they accrue to business assets or private assets.
Income from business operations In the case of a corporation or a commercial partnership, profits from cryptocurrencies are generally subject to corporate income tax or income tax as well as trade tax as income from business operations.
Any profit accruing in the event of a sale is regularly taxable. If a loss on disposal is suffered, the loss can be offset against other (positive) commercial income.
Determination of earnings, accounting and valuation issues
In the opinion of the Federal Ministry of Finance, units of a cryptocurrency are non-depreciable assets that are to be assigned to fixed assets (under financial assets) or current assets (under other assets) according to the general accounting tax principles.
The letter from the Federal Ministry of Finance from 2022 also contains information on what needs to be taken into account when determining profits using an income surplus calculation in accordance with Section 4 (3) of the Income Tax Act. According to the Federal Ministry of Finance, units of a virtual currency are to be regarded as non-securitised claims and rights comparable to securities as economic goods within the meaning of Section 4 (3) sentence 4 EStG, the acquisition costs of which are only to be deducted as operating expenses at the time the proceeds from the sale are received or, in the case of withdrawals, at the time of withdrawal .
Furthermore, the BMF letter 2022 addresses the income tax assessment of other points, including: acquisition of units of a cryptocurrency by means of hard fork, acquisition of issued tokens in connection with an initial coin offering (ICO).
In the opinion of the Federal Fiscal Court and the tax authorities, if the income accrues as private assets, it is subject to income tax under certain conditions. According to this, the acquisition of cryptocurrencies in private assets is not subject to income tax, but in principle represents an acquisition process.
If the cryptocurrency is held in private assets, income from lending, staking or airdrop is taxable as other income (§ 22 No. 3 EStG) from the point of view of the tax authorities. Income tax and solidarity surcharge then apply to this income, but not trade tax.
According to the BMF letter 2022 and also according to the decision of the Federal Fiscal Court of February 14, 2023, capital gains from cryptocurrencies in private assets are subject to income tax if the period between acquisition and sale is no more than one year (income from private sales transactions according to §§ 22 No. 2 , 23 EStG). If you sell after a year, you don’t have to pay taxes, no matter how high the profit is.
The tax authorities have clarified (in contrast to the BMF draft 2021) that this speculation period will not be extended from one year to ten years if the cryptocurrency itself is used as a source for generating income (no extension of the sale period according to § 23 paragraph 1 sentence 1 number 2 sentence 4 EStG). In the case of sales, losses can only be claimed within the speculation period to be observed.
Earnings from Proof of Work (Mining) and Proof of Stake (Forging)
According to the BMF letter, mining and forging represent acquisition processes and can, depending on the individual case, be private asset management or commercial activity. Taxpayer earnings include both the block reward and transaction fees received. If someone works professionally as a miner and earns income from this, according to the BMF, he is considered a commercial enterprise and his profits must be taxed accordingly.
If it is only about the management of one’s own assets, on the other hand, there should be no commercial activity. The tax authorities use several criteria to differentiate: The scope and professionalism can be an indication of commercial activity. Since numerous business models allow the generation of additional units with virtual currencies, these criteria must be checked in each individual case.
Sales tax classification
The Federal Ministry of Finance (BMF) issued a statement on the VAT treatment of Bitcoin and other virtual currencies in 2018 (BMF letter dated February 27, 2018). According to this, virtual currencies are equated with legal tender if these virtual currencies have been accepted by those involved in the transaction as an alternative contractual and direct means of payment and do not serve any purpose other than use as a means of payment (cf. ECJ ruling of October 22, 2015, C-264/14, Hedqvist, BStBl 2018 II p. 211). This does not apply to virtual play money (so-called game currencies or in-game currencies, especially in online games). Thus, the exchange of conventional currencies into Bitcoin and vice versa is a taxable other service,
fee and sales tax
The use of Bitcoin is equated with the use of conventional means of payment, provided that it does not serve any purpose other than that of a pure means of payment. The surrender of Bitcoin for the mere payment of a fee is therefore not taxable for sales tax purposes.
mining and sales tax
The services provided by the miners are non-controllable processes. The so-called transaction fee, which the miners can receive from other users of the system, is paid voluntarily and is not directly related to the services of the miners.
Wallets and Sales Tax
The “wallets” (electronic purses) are stored on the computer, tablet or smartphone and are used to store the so-called virtual currency. A wallet can e.g. B. be an app for a smartphone that can be downloaded from an app store. Insofar as providers for the digital wallets require the payment of fees, other services provided electronically are i. s.d. Section 3a (5) sentence 2 no. 3 UStG, which are taxable and taxable in accordance with Section 3a (2) or (5) sentence 1 UStG if the place of performance is in Germany (cf. also Section 3a.9a Para. 1 to 8 UStAE).
If the operator of a trading platform makes his website available to market participants as a technical marketplace for the purchase or trading of Bitcoin, this is purely EDP-based processing.
A tax exemption according to § 4 No. 8 UStG is out of the question.
However, if the platform operator buys and sells Bitcoin as an intermediary in its own name, tax exemption under Section 4 No. 8 Letter b UStG can be considered.
The importance of cryptocurrencies in business is increasing. Politicians and financial authorities have also taken a look at digital currencies.
Companies that use and work with cryptocurrencies must above all keep an eye on possible income tax and sales tax consequences.
Many issues, particularly those relating to income tax, are controversial. In the first supreme court decision of February 14, 2023, the BFH clarified on the subject of cryptocurrency that cryptocurrencies are economic goods that are subject to taxation as a private sale transaction if they are purchased and sold within one year (Section 23 (1) sentence 1 No. 2 EStG), i.e. are subject to tax.
Those affected should carefully examine their individual situation.