The new year has only just entered its third quarter and looking at the price development of Bitcoin and other cryptos compels me to wish all crypto investors a more successful year than the one we had in 2018 – a time when almost all cryptocurrency prices fell. In all likelihood, many of you are therefore now wondering what needs to be or what can be done with those losses in value of cryptocurrencies from a tax perspective. So, here you go:
Losses in value of cryptocurrencies relating to private assets
In part 1 of my series on Bitcoin and the like ”Happy new tax year – with Bitcoin and other cryptocurrencies” I explained that Bitcoin and other cryptocurrencies held as part of private assets (hereinafter collectively referred to as Bitcoin) are only subject to income tax if the purchase and sale takes place within the one-year speculation period (Section 22 No. 2 in conjunction with Section 23 Para. 1 No. 2 sentence 1 German Income Tax Act, EStG). However, this also applies if the Bitcoin were sold at a loss within the one-year speculation period.
The losses in value of cryptocurrencies can be offset against gains from the sale of other cryptocurrencies. On the other hand, the loss can also be offset against gains from the sale of other assets purchased and sold within the one-year speculation period. Such other assets include, for example, foreign currencies, precious metals, antiques, instruments; in short: all intangible and tangible assets. The loss can also be offset against profits from the sale of land within the ten-year speculation period. However, losses cannot be offset against other income, e.g. salary received as an employee (m/f/d) under an employment contract.
First of all, it is important to determine whether the Bitcoin that was sold falls within the one-year speculation period. How the one-year speculation period is calculated is explained in the section “How is the capital gain determined?” in my article ”Happy new tax year – with Bitcoin and other cryptocurrencies”.
If the Bitcoin has been held for more than one year, the losses in value of cryptocurrencies from the sale of the Bitcoin is not subject to income tax. The loss is then “lost” for income tax purposes. From an income tax perspective, it therefore makes sense to check your Bitcoin portfolio and dispose of any Bitcoin that has not been held for more than one year.
It should also be noted that the loss can only be taken into account in your income tax return if the loss has actually been realised, i.e. if the relevant Bitcoin has been sold. Please note that exchanging them into another crypto or foreign currency (e.g. dollars) is also deemed to be a sale for income tax purposes. However, the mere fact that the exchange rates have dropped cannot be taken into account for tax purposes.
If you realised losses in value of cryptocurrencies in 2018 within the speculation period, you need to enter those losses in Annex SO of your 2018 income tax return, as otherwise the losses will be lost. Once the official determination notice of your tax liability has been issued, any undeclared losses can only be claimed within the one-month appeal period by way of appealing the official tax determination notice. If no appeal is filed against the tax determination notice, the loss can no longer be claimed.
If you do not have any profits in 2018 that can be offset against any losses from the sale of Bitcoin (see above), it is still advisable to declare the losses in your income tax return. The losses will then be determined in a separate tax determination notice and can then be offset against profits from speculative transactions in subsequent years.
Losses in value of cryptocurrencies relating to business assets
If the Bitcoin is held as part of taxable business assets, any losses relating thereto would reduce the income achieved from the business operations.
A good time for gifts
If the intention is not to sell the Bitcoin despite a drop in value, donating Bitcoin at a low exchange rate is favourable for inheritance tax purposes. As I already mentioned in my article “Happy new tax year with Bitcoin and other cryptocurrencies (3)“, the decisive factor for the valuation of the gift is the exchange rate on the day on which the Bitcoin are transferred to the recipient. Of course, the inheritance tax allowances also apply to Bitcoin. The tax-free allowance for gifts e.g. from parents to their children currently amounts to 400,000 euros for gifts made within a ten-year period.
If the value subsequently recovers, this would not lead to inheritance tax being applied retrospectively. Gifting Bitcoin does not result in the one-year speculation period applicable to income tax starting anew.
Please note that any Bitcoin gifts, which exceed the usual amount for occasional gifts such as for birthdays and Christmas, must be divulged to the responsible tax authority.
Cover picture: Copyright © fotolia / VanHope