Still income tax
As already mentioned in part 1 of my article on the Taxation of Bitcoin, there are numerous other aspects to consider. In this, part 2, I will consider the ramifications of changing bitcoins into other cryptocurrencies, betting on bitcoins, taxation of other cryptocurrencies, as well as taxation abroad and in Germany. Last but not least, we will look at mining.
Changing Bitcoins into other cryptocurrencies
Many cryptocurrencies are only possible to purchase via Bitcoin. This means you have to exchange the currency amount (e. g. US dollar) into bitcoin and then purchase the other cryptocurrency. The exchange from one cryptocurrency to another or to a currency is the sale of the given currency and the purchase of the received currency. As a rule, an exchange rate gain or loss is realized. This price gain must also be disclosed in the income tax return within the one-year speculation period (you can find further information about the determination of capital gain in my first article on the Taxation of Bitcoin). You must ensure that you document the information required for determining the profit (amount, time of exchange, exchange rate).
CAREFUL when betting on Bitcoin
Products are currently being developed (or are already being offered, for example, in the USA) that can be used to bet on rising or falling Bitcoin prices. With such bets, the contract often expires on a certain date in the event of a price movement. In the past, the tax authorities have often refused to offset the acquisition costs of such products against profits from other sales transactions, irrespective of whether they were acquired before or after the introduction of the final withholding tax. In these cases, taxpayers are left with only the arduous and open-ended route through the tax courts as recourse. For this reason, in a worst-case the investors should also expect the tax authorities not to recognise the loss resulting from the use of such products for tax purposes. It would therefore be good if the creators of such products were to consider how this risk for investors could be minimised.
Taxation of other cryptocurrencies
So far, there are no case law or official instructions from the tax authorities on how to tax other cryptographic currencies. An overview of other crypto currencies can be found on Wikipedia, for example. However, it is to be expected that these cryptocurrencies will not be taxed differently than bitcoins, if and to the extent that they are comparable with bitcoins. In this respect, I refer to my other comments on the taxation of bitcoins.
Tax resident in Germany – Taxation of profits in other countries?
If you are a German tax resident (§ 8 AO) or habitual resident (§ 9 AO), you must state your worldwide income in your income tax return. If you hold Bitcoin etc with an exchange company based abroad (e. g. Kraken, https://www.kraken.com/), one must consider whether the attainment of a capital gain in the other country is taxable abroad by you or by the exchange company on your behalf. After all, you don’t want to experience a “nasty surprise” when entering the country.
For example, in November last year, Coinbase was required to provide US tax authorities with account data from users that had purchased, sold, transferred, or received amounts of $20,000 or more between 2013 and 2015…
It is therefore not the case that the foreign tax authorities cannot access your data. Against this backdrop, too, foreign exchange companies point to a possible tax liability for profits in their country. Whether and to what extent you have to tax the profits from the sale of Bitcoins in the state of the exchange company should be clarified with an expert of the respective foreign tax law. If there is a double taxation agreement between the other country and Germany, this agreement does not exempt you from a possible tax liability of the profits in the other countries.
Tax resident abroad – Taxation of profits in Germany?
Conversely, it is possible that you may have your tax residence (§ 8 AO) or habitual abode (§ 9 AO) abroad (EU/EEA or third country). If you hold your cryptocurrency at an exchange company in Germany, the profit (and loss) from the sale of Bitcoin is not subject to income tax in Germany. According to the income tax law currently in force, there is no domestic point of contact for German income tax (§ 49 Paragraph 1 EStG).
Bitcoin mining is of no practical relevance to the mostly (private) investors today, but mining may be relevant to the multitude of other cryptographic currencies. However, the taxation of bitcoin resulting from mining is also unclear.
In simple terms, the provision of computing power by the individual minors creates the respective cryptocurrency. Whether and, if so, how many units of the cryptocurrency the minor receives depends on factors that the minor cannot influence. At first glance, mining looks like participating in a lottery. In terms of income tax, this would be like “a jackpot” for you. The crypto currency received would be irrelevant for income tax purposes. However, it is much more realistic to assume that the cryptocurrencies obtained from mining can be attributed either to income from business operations (§ 15 paragraph 2 EStG) or to other income (§ 22 no. 3 EStG). The (positive) downside of this is that the expenses associated with mining can be deducted from the value of the cryptocurrency received for the provision of computing power as operating expenses or income-related expenses (objective net principle). The crypto currency must be valued at the rate at which you can dispose of the crypto currency.
To be continued. In part three of my Bitcoins & Co. series I will be looking at the issues surrounding cryptocurrencies in terms of gift and inheritance tax. Watch this space and take care!
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