Tax treatment of cryptocurrencies

General

The taxation of cryptocurrencies still worries most individuals and businesses. Many of the advisory companies such as tax consultants are often overwhelmed with the matter. That’s why, together with our partners, we have developed a general questionnaire, hoping to bring as much clarity as possible into the matter.

Disclaimer

The fiscal issues in connection with cryptocurrencies are still largely unresolved. As a consequence, both the tax office and also the fiscal court may depart from the tax treatment described herein. The authors do not represent or warrant in any way whatsoever that the contents made available are accurate, complete, or up-to date. Before starting an activity, a taxable person should always seek advice from a tax advisor or attorney at law.

Our Partners

WINHELLER Rechtanwaltsgesellschaft mbH

WINHELLER Rechtsanwälte & Steuerberater is one of the leading German law firms in the field of cryptographic currencies and blockchain and has specialized in tax matters as well as supervisory issues. In addition to the Frankfurt headquarters, the firm maintains meeting rooms in Berlin, Hamburg and Munich. As a one-stop shop, WINHELLER provides all legal and tax consulting services from a single source.

Website: https://www.winheller.com/

WOLF THEISS Rechtsanwälte GmbH & Co KG

Wolf Theiss is one of the leading law firms in Central, Eastern and South Eastern Europe (CEE / SEE), which has earned its reputation through a combination of unsurpassed local knowledge and strong international expertise.

Website: https://www.wolftheiss.com/

CryptoTax

The not yet finally clarified legal situation and the high processing costs of the transacted transactions cause many taxpayers and their tax advisers a headache. This has prompted CryptoTax to provide automated tax reporting solutions to crypto investors. The tax reports certified by a large auditing firm guarantee compliance with the current legal status at all times. Private investors can use the web-based platform CryptoTax to generate all documents necessary for the tax return. The report can be attached directly to the tax return.

Website: https://cryptotax.io/

Schürmann, Schürmann & Schürmann
Steuerberatungsgesellschaft mbH

We are a mid-sized tax consultancy firm that has been around for nearly three decades
several locations in Berlin and surrounding businesses and individuals tax
advises. One of our main focuses is the tax support of young companies
(Start-ups). In this context, we have an extensive in recent years
Expertise in the field of tax treatment of cryptocurrencies is established and available
Happy to help you with advice!

Website: https://www.steuerberater-berlin-schuermann.de/

Legal position & tax consideration

What should be generally known about the legal situation and the tax perspective of cryptocurrencies?

Germany

In Germany there are no explicit legal provisions governing the taxation of cryptocurrencies. In fact, the general tax regulations apply, although, due to the novelty of the assets concerned, their application is not always unproblematic. While some questions have already been consistently answered in practice, e.g. the classification of the private trade in cryptocurrencies as private disposal transactions, there are still various areas and new technologies that remain unresolved or controversial under tax law.

Recently, the Federal Ministry of Finance published its views on individual taxation issues for the first time by letter of 02/27/2018, which is binding upon the tax offices in Germany. However, the letter only addresses VAT. The Hamburg ministry of finance also dealt with the topic and published its opinion on the fiscal treatment of income from Bitcoin trading within the private capital sector on 12/11/2017; but this opinion is only binding upon Hamburg’s tax offices. Other administrative instructions or fiscal court decisions are not yet available.

Given this still uncertain legal situation and the various investment options, which may lead to different fiscal treatments, it is recommended to seek advice from a tax advisor or attorney-at-law in each specific case. WINHELLER’s experts will be pleased to assist you.

Austria

In Austria, there are neither statutory provisions on the taxation of cryptocurrencies nor relevant decisions of the Federal Tax Court or the Supreme Administrative Court. This results from the novelty of the phenomenon of cryptocurrencies and leads to a certain legal uncertainty. Note should be taken of the published information of the Federal Ministry of Finance (BMF) of 25 July 2017 on the tax treatment of cryptocurrencies. The legal views taken therein do not bind the taxpayer and, moreover, it does not cover all relevant issues. In the following, some general statements shall be made on cryptocurrencies; anyone active in this field should, in any case, consult with their tax adviser or lawyer.

Taxes

How are cryptocurrencies categorized for tax purposes?

Germany

Cryptocurrencies are no legal tender. In fact, they are considered to be intangible assets – at least under income tax law.

Austria

The Federal Ministry of Finance treats cryptocurrencies for income tax purposes as non-depreciable intangible assets.

Trading

How are profits/losses from crypto-trading taxed?

Germany

In case of purchases or sales of cryptocurrencies by a private individual, Section 22 No. 2 and Section 23 (1) No. 2 of the German Income Tax Act (Einkommensteuergesetz; “EStG”) will be applicable. The transaction is considered to be a private disposal of “other assets”. Pursuant to Section 23 (3) 1st sentence of the German Income Tax Act, the gain or loss is defined as the difference between the selling price, on the one hand, and the acquisition costs and income-related expenses, on the other hand. Hence, the initial cost simply needs to be deducted from the selling price. This means that the fees for trading on the exchanges are deductible.
Section 23 (3) 5th sentence of the German Income Tax Act additionally provides for a tax exemption limit of 600 € up to which all private disposal transactions within the assessment period are tax-free. If this limit is exceeded, however, the full amount, from the first euro, will be subject to taxation.
In this case, income tax will not only arise when cryptocurrencies are exchanged into euros or other foreign currency, but even when they are exchanged into other cryptocurrencies or when they are used for buying products or services. If the time period between the purchase and sale is more than one year (or ten years in the case set out in Section 23 (1) No. 2 4th sentence of the Income Tax Act), then the holding period defined in Section 23 (1) No. 2 1st sentence of the Income Tax Act applies. In such cases, the full gain on disposal will be exempt from taxation.

Generally, the so-called FIFO method set out in Section 23 (1) No. 2 3rd sentence of the Income Tax Act is applied both to determine the acquisition costs and the gain on disposal and to verify adherence to the holding period. Although the law does not require the above referenced first in, first-out method for cryptocurrencies, its application has become common practice. However, other opinions have also been voiced and it has been proposed that the calculation should be based on the LIFO method or – as concerns the determination of the acquisition costs – on average values.

In the event that cryptocurrencies are traded on a commercial basis (e.g. by providing a website for exchanging cryptocurrencies), the income from the trade business is subject to taxation pursuant to Section 15 of the Income Tax Act. Especially the holding period does not apply in this context. In addition to the income tax, trade tax will have to be paid in this case. However Section 11 (1) 3rd sentence No.1 of the German Trade Tax Act (Gewerbesteuergesetz; “GewStG”) provides for a tax allowance in the amount of 24,500.00 euros. In addition, the dealer will have to deal with issues concerning the VAT taxation applying to his activity.

Austria

In the view of the Federal Ministry of Finance, capital gains of cryptocurrencies are taxable as income from speculative transactions within the meaning of § 31 EStG (progressive tax rate of up to 55%). The prerequisite for this is that the period between acquisition and disposal is not more than one year (thus a tax exemption would apply, if the one-year waiting period is observed). Losses realized within the one-year period can be offset against speculative gains. For the entire income under § 31 EStG there is an exemption limit of EUR 440/year. According to the Federal Ministry of Finance, special rules apply in cases of “interest-bearing investments”. Cryptocurrencies held as a business asset are always taxable regardless of compliance with the one-year period, namely at the progressive tax rate of up to 55%.

Mining

How are mining revenues taxed?

Germany

As regards the taxation of mining, it is necessary to define whether the mining is performed on a private or on a commercial basis. In a reply to a parliamentary question, the federal government has expressed the view that income from private mining may constitute “other income” as defined in Section 22 No. 3 of the German Income Tax Act. It is not clear, however, whether this answer only referred to the transaction fees received or also included the block reward. It has also been argued that private mining is not subject to taxation at all as no service is being provided.

Concerning any possibly newly created coins, a taxation of a subsequent sale of said coins as a private disposal transaction can be ruled out, because the creation of new coins does not involve a purchase. However mining easily exceeds the threshold of a commercial activity, defined as a sustainable independent activity performed for the purpose of making a profit. In such case, the coins mined would initially be recognized at cost, generally consisting of the pro rata power and hardware costs. In case of a subsequent sale, the difference would be the taxable profit.

According to the above referenced letter from the Federal Ministry of Finance, neither the block reward nor the transaction fees actually constitute a remuneration for a service provided by an entrepreneur. This also means that input tax pursuant to Section 15 (2) No.1 of the Sales Tax Act (e.g. on hardware purchased) cannot be deducted.

Austria

According to the Federal Ministry of Finance, mining always leads to income from an active trade or business within the meaning of § 23 EStG (progressive tax rate of up to 55%); value added tax does, however, not fall due. In contrast to this view of the Federal Ministry of Finance it should, however, also be possible to carry out mining activities outside of an active trade or business. This would be the case if the activity of the taxpayer does not significantly exceed the nature and extent normally associated with the management of one’s own wealth. Consequently, in this case, the cryptocurrencies acquired through mining would be non-business assets for tax purposes. Pursuant to the view of the Federal Ministry of Finance, mining is not subject to value added tax.

Masternodes

How is income from masternodes taxed?

Germany

In the case of income from masternodes too, a distinction will have to be drawn between a private activity and a commercial activity. The threshold of a commercial activity is easily exceeded, which means that income, as defined in Section 15 (1) of the Income Tax Act, might be taxable. How income from a private activity will be taxed still remains unresolved. By analogy with private mining, it might be argued that such income is not taxable. A taxation as “other income” is, however, also conceivable.

The tax treatment of the 1,000 dash required as a condition for being recognized as a masternode operator also remains unresolved. Following the general principles, in case of a commercial activity, the dash would constitute business assets even if they have been previously purchased as part of private asset management. The contribution of private assets to business assets for the purpose of starting an activity as a masternode operator does not constitute a taxable disposal of dash. The dash will, in principle, have to be recognized at the current value at the time the contribution was made. However, if the dash have been acquired or manufactured within the last three years before their contribution, they will have to be recognized at a value not exceeding the acquisition or manufacturing costs. Any increases in value that may have occurred in the meantime would be assigned to the business assets. Prior to starting an activity as a masternode operator, the origin and use of the 1,000 dash should be discussed with a tax advisor or attorney at law.

In the event that, upon termination of the activity, the dash are retransferred to the private assets, the transfer will be considered as a withdrawal from business assets, which will be treated in the same way as a sale of business assets and can hence result in commercial profits. The holding period for the dash, set out in Section 23 of the Income Tax Act, will only start again after the withdrawal.

Austria

The Federal Ministry of Finance has not commented on this question in the information mentioned above; however, it can be assumed that the tax authorities – as in the case of mining – would assume income from an active trade or business within the meaning of § 23 EStG. Consequently, the 1,000 DASH held as collateral would be taxable business assets; capital gains generated from these would always be subject to income tax. It seems more correct to take into account the nature and extent of the activities of the taxpayer and to assume income from an active trade or business only exceptionally. As with mining, there should be no taxability under value added tax law, for lack of an identifiable recipient of the services. As mentioned, there are no written statements by the Federal Ministry of Finance on this.

Proposals

How are revenues from Dash Proposals taxed?

Germany

This question, too, is still unresolved in Germany. In many cases, income from dash proposals results from a commercial activity and is hence subject to income tax or corporate income tax if a legal entity is concerned. Under VAT law, however, the question arises whether – given the absence of an identifiable recipient – a service that may be subject to VAT has actually been provided. As this question still remains unresolved, the tax office should be consulted in such cases.

Austria

Again, there is no view of the Federal Ministry of Finance on this issue; if a profit is generated (i.e., not if for example the expenditures are equal to the revenues), income from an active trade or business within the meaning of § 23 EStG will generally be earned. As with mining, there should be no taxability under value added tax law, for lack of an identifiable recipient of the services. As mentioned, there are no written statements by the Federal Ministry of Finance on this.

Dealers and Service Providers

How is income taxed if it is generated by dealers/service providers in dash?

Germany

From a VAT perspective, deliveries and other services paid in dash or other cryptocurrencies, have to be treated in the same way as deliveries and other services paid in legal tender (e.g. euros). For VAT purposes, the assessment basis for a delivery or other service of the above kind is determined based on the value of the cryptocurrency received.

From an income tax perspective, the sale of goods/proposal of services for cryptocurrencies is a barter transaction.

Austria

Supplies or other services, the remuneration of which consists in Dash or other cryptocurrencies, shall be treated in the same way as supplies or other services the payment of which consists in legal means of payment (e.g. EUR). The taxable basis of such a supply or other service for the purpose of value added tax is determined by the value of the cryptocurrency received. Also for income tax purposes, it does not matter whether a dealer/service provider receives legal tender (e.g. EUR) or cryptocurrencies; in both cases, there is a (corporate) income tax liability.

Disclaimer

The fiscal issues in connection with cryptocurrencies are still largely unresolved. As a consequence, both the tax office and also the fiscal court may depart from the tax treatment described herein. The authors do not represent or warrant in any way whatsoever that the contents made available are accurate, complete, or up-to date. Before starting an activity, a taxable person should always seek advice from a tax advisor or attorney at law.