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Cryptocurrencies – Classification for tax purposes and taxation

In recent years, cryptocurrencies have acquired ever greater significance. There are nevertheless taxation issues that also need to be considered in relation to the gains arising from crypto trading. Currently, there are no specific statutory regulations for the taxation of cryptocurrencies and uncertainties thus exist in this respect both on the part of investors as well as the state.

On 10.5.2022, the Federal Ministry of Finance (Bundes­ministerium der Finanzen, BMF) published its long-awaited circular on the “income tax treatment of cryptocurrencies and other tokens” (reference: IV C 1 - S 2256/19/10003 :001). The first part explains technical terms and issues and this is followed, in the second part, by the classification for income tax purposes.

Cryptocurrencies are assets

Generally, when carrying out the taxability test for cryptocurrencies, two particular questions need to be discussed:

  • Are cryptocurrencies assets?
  • Is there a structural deficit in enforcement?

In specialist literature and court decisions, the prevailing opinion is that every crypto unit is an asset. This view is shared by the BMF and it has substantiated this by pointing out that virtual currencies can always be attributed to the holder on the basis of a private key and that the holder is solely able to initiate a transaction. The BMF is of the opinion that it does not matter here if the crypto units are managed via trading platforms such as, e.g., Bitpanda, even though in these cases the economic owner effectively does not have a private key. A further argument that is presented for cryptocurrencies having the characteristics of an asset is that it is possible to independently value the individual units. The valuation can be carried out on the basis of the market rates that can be viewed on platforms (e.g. Bitpanda) or on web-based lists (e.g. https://coinmarketcap.com).

Tax treatment of the disposal of cryptocurrencies held as private assets

When cryptocurrencies that are held as private assets are sold this could produce income from private disposals pursuant to Section 22 no. 2 in conjunction with Section 23(1) sentence 1 no. 2 of the Income Tax Act (Einkom­mensteuergesetz, EStG). It should be particularly noted that the exchange of one cryptocurrency into another (crypto) currency or the purchase of goods or services using cryptocurrencies constitute sales transactions. The disposals would be taxable if the sale had taken place prior to the expiry of the holding period and the tax-exemption limit of € 600 had been exceeded. The speculation period is one year and afterwards the units may be sold free of tax. If there has been an exchange then the speculation period for the newly acquired cryptocurrency would begin anew from the date of the exchange. To simplify matters, for the determination of the capital gains, taxpayers may apply the First-In, First-Out method (FIFO) as the sequence of usage, alternatively they can apply the average value method.

Contrary to expectations, it was the view of the BMF that the holding period should not be extended to ten years. This had still been in the draft circular and was planned for specific activities on the crypto market such as, for example, lending (crypto credit facilities) or staking (making crypto units available for the generation of a new block).

Block creation in the context of proof of work and proof of stake

In the opinion of the BMF, income that has been generated in the context of block creation using the proof of work mechanism (so-called mining) has to be classified as a commercial activity. The block reward for the newly generated block constitutes an acquisition and has to be recognised in the accounts accordingly.

Moreover, in the opinion of the BMF, block creation using the proof of stake mechanism (so-called forging) also leads to a commercial activity. Although, here, a distinction has to be made between forging and staking. Forging generally results in income from commercial operations, however, staking has to be allocated to income from other services.

The initial measurement has to be performed on the basis of the latest prices on a trading platform and not - as was still envisaged in the draft circular - the average price from three different trading platforms.

Private asset management or commercial crypto trading

The criteria that can be used to distinguish between private asset management and commercial crypto trading are the familiar ones used for defining commercial securities and currency trading. According to a Federal Fiscal Court (Bundesfinanzhof, BFH) ruling of 20.12.2000 (case reference: X R 1/97), the indicators of a commercial activity that have to be applied are:

  • having a presence that is typical for a trading company or a bank,
  • running a commercially organised business operation, and
  • the use of a market that is subject to reliance upon professional experience.

However, it is not relevant whether or not the size is big or there is a high turnover rate. If it is deemed that there is no commercial trading but, instead, private asset management then such activity has to be allocated to other income pursuant to Section 22 no. 3 EStG. Accordingly, taxable income would then only arise if the tax exemption limit of €256 was exceeded.

Cooperation obligations and record-keeping requirements

The BMF did not express a view on any cooperation obligations and record-keeping requirements. It remains to be seen whether a further circular will be published.

Please note: Something that is especially important for the classification for tax purposes of cryptocurrencies and other tokens is the analysis of the characteristics of a cryptocurrency and/or a token. The technical and legal bases could, in some cases, deviate greatly from one another and will in any case have to be considered separately.

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