At least one rule when it comes to the taxation of proceeds from cryptocurrencies is simple: Anyone who has owned Bitcoins or other cryptocurrencies for more than a year can take profits from price changes tax-free – no matter the amount. Within the first 12 months after purchase, the profit may not exceed 599.99 euros – from then on taxes are due. However, it is doubtful whether this regulation will continue to apply for a long time, because it is expected that there will be separate tax laws for crypto transactions as early as 2022.
Cryptocurrencies are currently considered “other economic goods” for tax purposes and are taxed accordingly. In the language of the tax office, buying and selling are called “private sales transactions”. That’s why (almost) all private crypto investors know the attachment SO for “other income” – this is where the profits are entered. But if you invest in several currencies, buy and sell more frequently and possibly via different wallets, you will find it difficult to submit the best possible tax return with Excel spreadsheets and screenshots of rates on specific dates.
The legislator does not yet have any fixed tax laws on offer
The individual tax offices currently have discretionary powers, apart from the basic regulation of holding periods. The financial courts are primarily waiting for a decision by the Federal Fiscal Court in Munich, which will probably be used to clarify many questions relating to the taxation of blockchain-based offers in a binding manner next year.
At the same time, a uniform formulation of a crypto tax law is taking place at EU level. Because, to name just one example, it is currently unclear whether digital means of payment such as BTC should be taxed in the same way as the smart contract tool ETH. Will deals in BTC be treated as foreign exchange deals in the future, but deals in ETH will be treated like trades in commodities?
The courts do not hide the fact that many things are unclear: “The legislature is neither obliged nor able to react immediately to every (technical) innovation in a regulatory manner. He has a wide margin of discretion and may first await their first development. In terms of equal taxation, he only has to react when serious grievances become apparent”. (Baden-Württemberg Finance Court, judgment of June 11, 2021).
Is the BTC run too fast for the courts and traditional tax advisors?
The Munich Federal Fiscal Court has a lot to do, because it is not only the questions about transaction profits and losses that have to be clarified with legal certainty. Another topic: Mining or prospecting for cryptocurrencies. The goal of mining is to make a profit – tax experts currently assume that these profits must be taxed as income from a commercial enterprise (Section 15 EStG) (draft letter from the Federal Ministry of Finance dated June 17, 2021). A solid legal basis is still missing.
It’s not just the courts and tax offices that have been overwhelmed by the lightning-fast rise of blockchain technology. Long-established and tradition-conscious tax consultants and tax offices are faced with challenges that can be too great in many cases.
Perfect documentation of all crypto transactions is mandatory
If courts and tax offices themselves point out that there is still no legal basis for the taxation of crypto transactions, only one thing helps: prepare yourself perfectly for all upcoming laws, rules and regulations in order not to miss any opportunities and to avoid risks. The change in holding periods, the raising or lowering of exemption limits, the different treatment of different currencies or the classification of mining profits – these are all topics that a taxable crypto investor will certainly have to deal with in the next few years. This can result in higher taxes, but also great opportunities.
It is clear that the tax authorities will always expect meticulous documentation of all transactions. Germany is no exception: All European countries will make similar determinations, loopholes for BTC profits should be prevented at EU level. In the age of digital nomads working all over the world and financially independent big winners of crypto development, accountants and digital tools must have a strong international competence that goes beyond the borders of Europe.
Tax evasion: cells instead of dream vacations
Tax evasion is only considered a small story by naive contemporaries. After all, anyone who conceals profits from crypto transactions from the tax office is treated in the same way as any other tax evader: In particularly serious cases, you have to be traded from a prison cell for up to 10 years, provided the internet works there. This draconian penalty (Section 370 of the Fiscal Code) is rarely imposed, but painful fines are the norm for tax evasion, and high interest rates and penalties for late payment are also incurred.
The tax investigation is further than the legislature: IT forensic experts track down transactions despite encryption on computers and requests for information from the tax police to a crypto exchange are often answered. No ambitious stock exchange operator wants to be blacklisted by the German authorities, because that means being stigmatized throughout Europe.
What must not be overlooked: the old saying “Ignorance does not protect you from punishment” is particularly true, as the Federal Fiscal Court has made clear. Even if there are doubts as to what and how much is taxable, the person concerned must inquire with the responsible authorities themselves. Tax sins expire after 5 years at the earliest (sometimes only after 10 years) – this also answers the question of how long all documentation should be available at all times: purchase and sale date, purchase price, the exact quantity, the corresponding stock exchange or platform, the sale price with calculations that are as specific as possible.