Initial Situation
For some years now, Steffen has been reporting on the tax treatment of cryptocurrencies in his articles1.
A major factor of uncertainty in the taxation of transactions with cryptocurrencies is that there is (almost) no publication by the tax authorities on the income tax treatment of cryptocurrencies (Finanzbehörde Hamburg, DStR 2018, 527; OFD Nordrhein-Westfalen, DB 2018, 1185).
A few days ago, the supreme tax authorities of the federal states (hereinafter: “BMF“) published a 24-page draft of an administrative instruction (hereinafter: “draft“, status: 03.06.2021), which the associations have received for the submission of comments. The associations can submit comments on the draft by mid-July. In this and the next article, we would like to provide an overview of the main statements of the tax authorities on the income tax treatment of cryptocurrencies contained in the draft.
Explanations
In the first 22 paragraphs of the draft, some terms from the “crypto world” are explained. First, it describes what the financial administration understands by the term virtual currencies (hereinafter also: “cryptocurrencies“).
In the explanatory part of the draft, tokens are described and divided into different types of tokens, e.g., currency tokens, utility tokens, security tokens. However, the chosen classification of tokens should not obscure the fact that for taxation purposes it is essentially a matter of which legal status, or which contractual relationship relates to the ownership of the token. The token and its designation are ultimately irrelevant for the tax assessment. The legal structure also has an influence on the regulatory assessment and the resulting consequences, e.g., in the case of an initial coin offering.
Mining is supposed to generate business income
In deviation from the above-mentioned Hamburg tax authority, the BMF assumes in the draft that mining leads to an acquisition transaction of cryptocurrencies and thus the capital gains achieved later can be subject to income tax.
The BMF suspects that mining leads to business income. This has far-reaching consequences, since every – no application of the one-year speculation period! – capital gain is subject to income tax and trade tax (up to 18.2%). The accruing burden of trade tax is mitigated by the at least partial crediting of trade tax against income tax. The BMF’s presumption of business income is rebuttable, whereby the draft in this respect only refers to the general criteria for the fiscal demarcation between private asset management and business activity and thus there are no clear demarcation criteria.
According to the draft, the mining pool is to establish a partnership for income and trade tax purposes (so-called co-entrepreneurship), for which a determination of profits for tax purposes and tax returns are to be prepared.
Not included in the draft is the indication that the trade tax liability of income from mining, however, also depends on whether the miners conduct the business in a permanent establishment (§ 12 AO) in Germany.
The average value from the exchange rate of three different trading platforms (e.g., Kraken, Coinbase and Bitpanda) or web-based lists (e.g., https://coinmarketcap.com/de) can be used as the acquisition cost (market price) for the cryptocurrencies acquired from mining. If a stock exchange price is available, this is to be used as the acquisition cost.
The business nature of mining for income and trade tax purposes also gives rise to follow-up questions on which the draft does not comment, such as the question of whether the cryptocurrencies not obtained through mining also belong to the miner’s business assets or whether they are private assets for income tax purposes.
Insofar as miners have so far relied on the statements of the Hamburg tax authorities, they should check to what extent their tax returns or tax assessments can still be changed or should even be changed in order to avoid possible consequences under criminal law. Steffen Rapp has pointed out such consequences together with Florian Kraus in another context (see the article “Income tax: Last chance self-indictment? What do Airbnb lessors and (former) investors at Austrian banks have in common?“)
Divestment of cryptocurrencies
If cryptocurrencies are bought and sold, the BMF refers to the criteria developed for foreign exchange and securities traders for differentiating between business and asset management income. This makes it clear that cryptocurrencies can also be bought and sold on a large scale, as long as the taxpayer does not act “like a trader” or in a “typical banking manner” on the market.
According to the draft, an individual consideration or the consumption sequence first in-first out can be assumed to determine the acquisition costs of the sold cryptocurrency. In this respect, the taxpayers have some leeway.
Less surprisingly, according to the Federal Ministry of Finance, the exchange of virtual currencies for other virtual currencies or for the payment of goods or services constitutes a sale of the surrendered cryptocurrency, which is subject to income tax within the one-year speculation period. In these cases, the proceeds from the sale are measured according to the agreed euro amount or the market rate of the surrendered units of the virtual currency.
The date indicated in the Wallet can be used as the acquisition and disposal date.
Attention: As was to be feared (see the article “Happy New Tax Year – with Bitcoin and other cryptocurrencies (1)“), according to the draft, lending, cold staking, staking together with a master node or proof of stake can lead to an extension of the speculation period from one to ten years (section 23 (1) no. 2 sentence 4 EStG).
If cryptocurrencies are held, of which the one-year speculation period applies to one part and the ten-year speculation period to the other part, those for which the speculation period has already expired are deemed to be sold first.
(1) To Dr Steffen Rapp’s former articles
Happy New Tax Year – with Bitcoin and other cryptocurrencies (1)
Happy New Tax Year – with Bitcoin and other cryptocurrencies (2)
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