Tax treatment of cryptocurrencies such as Bitcoins & Co.
Tax risks in connection with the trading or mining of cryptocurrencies
The tax offices usually assume that profits are taxable. 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 US, 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).
On 30 May 2018, the EU’s 5th Money Laundering Directive came into force, which must be transposed into national law by the Member States by 10 January 2020. This includes, for example, the expansion of the target group to platforms for exchanging virtual currencies and providers of electronic wallets. These platforms will be treated on an equal footing with banks and payment service providers insofar as their function is similar. There will then also be an obligation for exchange platforms for crypto currencies to centrally store the identity of users and their wallet addresses.
If sales or profits from trading or mining cryptographic currencies are taxable and are not declared, there may be tax evasion or reckless tax reduction, which can result in severe fines and even prison sentences. Intent, and thus tax evasion, can also occur if someone does not declare profits, although one is aware of the possible consequences of tax evasion. One approvingly accepts that one knowingly commits a crime.
It is therefore advisable to include profits from mining and trading cryptocurrencies in the tax return or to appoint a tax expert to carry out a review on this. Once declared, even if it turns out later that there was no tax liability, one cannot be accused of tax evasion. If one realizes only later that one has not disclosed taxable profits from appropriate business in the tax return, a self-declaration of undeclared funds may still offer another way out.
“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, since e.g. with the use of the Bitcoins for paying or exchanging an interaction with other persons takes place. Others are of the opinion that this is only the case if people offer their mining activities for a fee, i.e. market the generated bitcoins themselves or make their computer capacity available for a fee.
- 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 when considering this issue. This includes, for example, the depreciation of hardware, electricity, rent and ancillary rental costs, travel costs, literature and training costs, IT costs in connection with the server, administration costs, costs for bookkeeping and tax consultancy. Only if a total profit is expected to be achieved over the entire lifetime, a trading business is present. The difficulty here is to estimate the turnover, since the prices of the cryptocurrencies fluctuate strongly. Should initial losses occur, a trading activity may still exist and it should be taken care of that these are determined and carried forward by the tax office so that they can later be offset against future profits.
If the above-mentioned requirements are met, a trading activity will generally exist in the case of mining and cloud mining. Some tax offices 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 case that much is shifted or you can make a living from it, an office furnished for it is maintained or even personnel is used for it. Whether in your case there is a trading business or not, we will gladly check for you on the basis of the individual conditions in your case.
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 office.
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 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 27.2.2018, the 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, is a service for money within the meaning of Art. 2 (1) lit. c VAT system directive, which falls under the exemption under Article 135(1)(e) of the VAT system directive. This means in detail:
- The exchange of Bitcoin is a taxable other service which is VAT-exempt according to § 4 No. 8 letter 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). This must be documented by the performing contractor.
- The services provided by miners are not VAT liable.
- If providers demand payment of fees for the digital wallets (electronic purses), other services within the meaning of Section 3a (5) sentence 2 no. 3 UStG are provided electronically, which are taxable and taxable in accordance with Section 3a (2) and (5) sentence 1 UStG if the place of performance is in Germany (see also Section 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 § 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 (so-called game currencies or ingame currencies, especially in online games), as this is not a means of payment in the sense of the VAT system.
If in doubt, a VAT expert should be consulted.
Income tax treatment
a) Trading by private investors
Bitcoins are treated as intangible assets under income tax law. If these are allocated to the private sector, private sales transactions exist in accordance with § 23 EStG (formerly also referred to as “speculative transactions”). The profit is calculated from the difference between the sales price and the acquisition costs. 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 acquisition costs should be determined using the FIFO (first-in-first-out) method. If possible, taxes can be saved by allocation to private assets.
Capital gains of up to € 600 per calendar year remain tax-free. 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. 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 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 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 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.
Disclosure under commercial law
Bitcoins are abstract and can be activated. They may be shown as other current assets. If the planned holding period is more than one year, the intangible assets acquired should be reported as fixed assets. Whether this also applies to other self-created cryptocurrencies, must be judged on the basis of the technology and structure of the rights and obligations.
Bitcoins and Co. are not securities and are not included in the income statement. The acquisition costs can therefore be immediately deducted as an operating expense.