Are profits from trading cryptocurrencies subject to tax?

The BFH (Case No. IX R 27/21), Germany’s highest tax court, was supposed to deal with this question; a decision was expected in February. This has now come to nothing. The appeal filed by the taxpayer has been withdrawn in the meantime.

With increasing crypto trading, the question of tax liability for profits from crypto trading naturally also arises.

Read the details of this case and the recommendations of our expert Dr Christopher Arendt.

Crypto trading and tax liability

Both the fiscal authorities and the fiscal court of Baden-Württemberg assumed that the profits arising from the purchase and sale of cryptocurrencies within one year were to be treated as private sales transactions and subjected them to taxation.

One of the persons concerned filed a lawsuit against this. As a result, the highest German tax court dealt with this interesting question.

Many taxpayers had hoped that the BFH could use the ruling to clarify fundamental issues surrounding the topic of crypto and taxes. Even though the tax issues to be dealt with in the financial litigation involved the (simple) purchase and sale of cryptocurrencies rather a clear constellation, the BFH’s explanations would have been of great interest. Nevertheless, it should be noted that the crypto industry has already evolved today and much more far-reaching tax questions need to be answered. Investment forms such as lending, staking or even the investment in NFT’s and the associated airdrops or but mergers in DAO’s are intensively pursued, but from a tax and legal point of view, many question marks remain.

In this respect, many tax questions also remain unanswered on the part of the tax authorities. It is not helpful that the tax authorities have still not published the final version of the BMF letter of 17.06.2021 “Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von Token” (draft version). Currently, it is reported that the draft continues to be intensively discussed and the many objections are being reviewed. Although it must be acknowledged that the tax authorities have already dealt with the main features of the more far-reaching tax issues, this does not provide any legal certainty.

At the same time the Federal Government gives the impression that also a legal amendment of the tax regulations concerned in this respect is conceivable. The FDP politician Frank Schäffler, for example, tends in an interview in his WEBLOG to subject the income from crypto transactions to capital gains tax. However, this would require an amendment to Section 20 of the Income Tax Act and would probably completely overhaul the principles communicated in the draft BMF letter.

The situation is particularly difficult for the millions of Germans who invested in cryptocurrencies last year and now have to prepare their 2021 income tax return. Like the tax advisors, they have no choice but to follow the draft of the Federal Ministry of Finance without knowing whether it will hold up at all.

What was the issue in the withdrawn appeal before the Federal Fiscal Court?

Both the fiscal administration and the FG Baden-Württemberg (11.6.21, 5 K 1996/19) assumed that the profits arising from the purchase and sale of cryptocurrencies within one year were to be treated as private sales transactions and subjected them to taxation.

The plaintiff objected to this, in particular with the following two arguments:

Cryptocurrencies are not intangible assets and thus conceptually not to be included under private sales transactions.
Even if the tax authorities wanted to carry out taxation, they could only do so if the parties concerned provided them with this information with their tax returns. Without the active cooperation of the taxpayer, the tax office would have no possibility of obtaining knowledge of any profits. Against this background, a uniform taxation of all profits from cryptocurrencies is not ensured. This unequal treatment constitutes a structural enforcement deficit of the tax collection. Consequently, taxation of these profits was already excluded on the merits.
The Fiscal Court (Finanzgericht, FG) did not agree with these arguments and referred in particular to the broad scope of application of the relevant tax standard as well as the (in any case legally prescribed) extended duty of the taxpayer to cooperate in foreign matters.

What are the arguments against taxation of crypto profits?

The plaintiff defended himself against taxation in particular with the following two arguments:

Cryptocurrencies are not intangible assets and thus conceptually do not fall under private sales transactions.

Even if the tax authorities wanted to carry out a taxation, they could only do so if the persons concerned provided them with this information with their tax return. Without the active cooperation of the taxpayer, the tax office would have no possibility of obtaining knowledge of any profits. Against this background, a uniform taxation of all profits from cryptocurrencies is not ensured. This unequal treatment constitutes a structural enforcement deficit in tax collection. Consequently, taxation of these profits was already excluded on the merits.

The Fiscal Court (Finanzgericht, FG) did not agree with these arguments and referred in particular to the broad scope of application of the relevant tax norm as well as the taxpayer’s (in any case legally prescribed) extended duty to cooperate in foreign matters.

What happens now?

The Federal Fiscal Court’s opinion on this matter was eagerly awaited. This was especially true because it would have been a fundamental decision. At the same time, however, the facts in dispute with the (simple) purchase and sale of cryptocurrencies were also a fairly clear constellation. Today, the crypto industry has already developed further.

Investment forms such as lending, staking or even the investment in NFT’s and the associated airdrops or but mergers in DAO’s are intensively pursued, but fiscally and legally many question marks remain.

In any case, the tax authorities have already dealt with the broad outlines of the more far-reaching questions in the draft BMF letter dated 17.06.2021 “Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von Token”. At present, this draft is probably being intensively discussed. However, the date of publication of the final BMF letter is likely to be questionable.

Questions on crypto trading and taxation?

Lawyer
Specialist lawyer for tax law
Managing Director of ACCONSIS

Dr. Christopher Arendt

Service-Phone
+ 49 89 547143
or by e-mail c.arendt@acconsis.de

My recommendation?

The tax aspect behind crypto trading with cryptocurrencies or crypto art also harbours many dangers and challenges. I would be happy to advise you individually on this and work with you to find solutions to safeguard your digital returns.

If you have any questions on this topic, please do not hesitate to contact me.