In the first two parts of my series “Happy New Tax Year with Bitcoin and other cryptocurrencies” I talked about Bitcoin and the German income tax, including the tax implications of swapping Bitcoin into other cryptocurrencies, bets on Bitcoin and the tax implications of other cryptocurrencies. Part 3 now deals with Bitcoin and other cryptocurrencies with respect to VAT, German inheritance and gift tax.
Cryptocurrencies and VAT
The Court of Justice of the European Union (CJEU) (of 22/10/2015, C-264/14, DStR 2015, 2433 – German) decided that swapping Bitcoin into other currencies falls under the VAT exemption for currencies (Sec. 4 No. 8 c German VAT Act, UStG). However, the downside of falling into this exemption is that any VAT paid on services received with respect to such deals cannot be off set as input tax (Vorsteuer). Such expenses therefore constitute a real cost (pre-tax loss).
If, in connection with spending Bitcoin, other services are rendered, it must be evaluated whether or not such services are merely independent ancillary services which would also fall under the exemption. At the same time it should be clarified if the services constitute one single service subject to VAT or two separate services, i.e. one subject to VAT and one exempt from VAT.
The CJEU’s judgment was delivered with respect to Bitcoin. However, it would stand to reason that the same principles apply to comparable cryptocurrencies, i.e. that they are also exempt from VAT.
Cryptocurrencies and German inheritance and gift tax
Gift tax: volatility of cryptocurrencies
Cryptocurrencies can be transferred from one person to another, i.e. also gifted on and even inherited. Please note that gifting cryptocurrencies is subject to inheritance tax, to the extent that the tax free allowances (e.g. 500,000.00 for spouses or 400,000.00 for children) are not exceeded within ten years. If you gift cryptocurrencies, a strict closing date principle is applied. This means that the gift of the cryptocurrency is evaluated exactly on the day on which the gift became effective. Mostly, the exact time of the transfer of the cryptocurrency is also documented.
For the purposes of inheritance tax, cryptocurrencies have to be evaluated in accordance with the generally applicable rules, i.e. by reference to their market value (Sec. 12 para. 1 German Inheritance Tax Act (ErbStG) in connection with Sec. 9 BewG – German). The market value is derived from the sales of the relevant cryptocurrency on the next reference date. If the exact point in time of the transfer of the cryptocurrency can be ascertained and documented, the value of the gift is calculated by reference to the rate offered by the relevant cryptocurrency exchange. In this case it does not seem appropriate or required to ascertain an average daily price (of possibly all!) cryptocurrency exchanges.
Therefore, if you are considering gifting Bitcoin or other cryptocurrencies to someone, it is advisable to use the very volatile Bitcoin exchange rates to affect the gift at the lowest rate possible as that way you can reduce the value of the gift.
And don’t forget that you need to notify the relevant tax authority of any such gifts – independently of whether the gift was above or below the tax free allowance!
Cryptocurrencies and exchanges located abroad
Please note that gifting cryptocurrencies is also subject to German gift tax if you hold your cryptocurrencies at an exchange located abroad. To the extent you or the person receiving the gift is a tax resident (Sec. 8 AO) in Germany or a habitual resident in Germany for tax purposes (Sec. 9 AO), the gift is subject to German gift tax if it exceeds the tax free allowance.
Before any gift is given, it is also important to clarify if the gift is not also subject to any gift or other tax in the foreign country. If so, this would mean a double tax on your assets if the foreign tax is not taken into account in Germany.
A temporary relocation of your principal place of residence abroad does not get around the obligation to pay gift tax if you are a German citizen. In this case, the gift will be subject to German gift tax within five years of the relocation (Sec. 2 para. 1 No. 1 b) ErbStG).
No German gift tax for people who are residents abroad
If the investor and the person receiving the gift are tax residents abroad and the cryptocurrency is held on an exchange located in Germany, no German gift tax will apply. However, you should still check if the gift is subject to tax in the relevant foreign country.
The aforementioned reference day principle also applies in cases of inheritance. This means that the cryptocurrency is evaluated by reference to the rate applicable on the date of the death (strict reference day principle). So, what is the relevant rate? If a rate can be identified reasonably close to the time of death, this should be accepted by the tax authority. The same applies to an average price of the relevant exchange at the day of the death. The calculation of an average daily rate of the relevant cryptocurrency of all exchanges will not be possible in practice or at least not without disproportionate effort. Rate fluctuations after the date of the death are irrelevant for inheritance tax purposes when evaluating the cryptocurrency subject to the inheritance due to the strict reference day principle.
Securing the access to your cryptocurrency (wallet)
Your wallet and therefore your assets should be accessible, not only in case of death. Without the personal access code (private key) to your wallet, it will be difficult for your heirs to access your assets. In order to access the cryptocurrencies, it can be helpful for your heirs if the exchange carries out KYC checks. If no KYC checks are carried out by the exchange, the private key is the only way of proving who can dispose of the cryptocurrency. If the heirs do not know the private key of the deceased, disposing of the cryptocurrency of the deceased is impossible.
Therefore, if the heirs have difficulty accessing the cryptocurrency of the deceased, this situation (still) needs to be explained to the inheritance tax authority.
In the next part of my series “Happy New Tax Year with Bitcoin and other cryptocurrencies” I will look at the question to what extent cryptocurrencies have to be considered as part of the international exchange of information and what should be done if income from cryptocurrencies has so far not been included in the tax return.