Criminal tax proceedings against crypto trader: tax office has first data available

The tax office has gained access to crypto trades – a wake-up call for all crypto traders.

• Is there now a threat of a wave of criminal tax proceedings against crypto traders?
• How do I react when the tax authorities inquire?
• What should I do if I am included on the record available to the tax office and the tax office writes to me?

With the rise of crypto profits, tax aspects are coming into focus. Supposed anonymity is being exposed while authorities are expanding their databases. In my article, you will learn what to look for when writing to the tax office and how you can protect yourself before it is too late.

Criminal tax proceedings against crypto trader: tax office has first data available

By trading cryptocurrencies such as Bitcoin and Co. and other digital assets, many investors have made significant profits.

The downside of these profits, however, is that they may have tax relevance and thus the submission of tax returns would have been mandatory.

Many traders were already overwhelmed with the processing of the transactions and also an accurate tax classification was for a long time (- even today) a major challenge even for the advisory environment. In the past, this led to the fact that not all investors complied with their tax obligations.

This is also known to the tax authorities. Initial spot checks by the tax authorities now confirm this assessment.

As a crypto trader, am I anonymous to the tax office?

Many investors trusted the anonymity of transactions. However, this is not entirely correct.

Every transaction is permanently and transparently stored on the blockchain along with the associated wallet addresses. So, with enough information, it is possible to link them to real people and thus identify a person. When registering on a crypto exchange, people often provide their full name, email address or credit card details in order to trade there. Based on this information, the identity can also be assigned to a wallet without much effort. Consequently, cryptocurrencies do not offer anonymity, but only pseudoanonymity.

Financial authorities are developing databases to identify crypto traders in this way and to assign transactions on the blockchain.

How does the tax office obtain my data as a crypto trader?

Currently, the tax authorities are sending a collective request for information to various crypto exchanges such as Bitcoin.de. This involves requesting data from users who traded Bitcoin between 2015 and 2017 and generated a turnover of more than 50,000 euros per year.

This data is then matched with existing tax returns and used nationwide to uncover tax evasion. During the aforementioned period, the value of Bitcoin increased tremendously, which allowed many crypto traders to make significant profits. This makes the records particularly interesting from the perspective of the tax authorities.

What do the letters from the tax office look like?

In our experience, the letters are mainly sent to the taxpayers by the tax offices at their place of residence. These are usually formulated in a rather unspecific manner and request the affected persons to subsequently declare their crypto income for certain periods. Criminal tax proceedings have not yet been initiated on a regular basis.

In special cases, the letters are sent directly by the fine office. In this letter, it is communicated that criminal tax proceedings will be initiated against the person concerned and one is also requested to cooperate.

What do I do as a crypto trader if I am contacted by the tax office?

Depending on which sender addresses the letter to you, you should think about a comprehensive cooperation. In particular, the question to what extent the possibility of a voluntary disclosure still exists must be answered.

An effective self-disclosure to the tax office leads to an obstacle to prosecution, i.e., in simplified terms, you declare crypto income penalty-free (- but not tax-free). The following requirements in particular must be observed when making a voluntary disclosure:

• Completeness: the self-disclosure must include all undeclared income for at least the last ten years. Partial self-disclosures do not lead to exemption from punishment.
• Timeliness: A voluntary disclosure can only have an exempting effect if it is made before the tax authorities discover the tax evasion. If, for example, audit or investigation proceedings have already been initiated or are imminent, the voluntary disclosure may lose its penalty-exempt effect.
• Payment of the evaded taxes: The evaded taxes plus interest must be paid within a period set by the tax office.

Is a penalty exempting voluntary disclosure still possible for me as a crypto trader despite the request of the tax office?

Whether a voluntary disclosure is possible must be examined in detail in each individual case in view of the complex legal requirements.

If criminal proceedings have already been initiated, an effective voluntary disclosure is regularly no longer possible.

If you are contacted by the tax office at your place of residence, the blocking reason of the discovery of the offence by the tax office within the meaning of § 371 Para. 2 No. 2 AO must be checked in particular.

An act discovery is present, if the tax authority knowledge of the tax evasion or one of its parts as well as of the person, who evaded the tax or this attempted. It is not necessary for the tax authority to know all the details of the facts of the case. It is sufficient if it has indications of tax evasion that prompt it to conduct further investigations.

Once the offence has been discovered, a voluntary declaration can no longer lead to immunity from prosecution.

What happens if I as a crypto trader do not respond to the letter from the tax office?

Failure to respond or respond appropriately to the letter from the IRS can lead to a number of unpleasant consequences that, in my view, should be avoided at all costs.  

• Criminal proceedings: If tax evasion is suspected, the tax office may initiate criminal proceedings. Tax evasion can be punished with fines or even imprisonment.
• Searches: Searches and other investigative measures by the tax investigation department may occur.
• Estimation: If you do not file a tax return or do not respond to other inquiries, the tax office may estimate your tax liability. This estimate is often to the disadvantage of the taxpayer.
• Enforcement: If estimated taxes are then assessed, the tax office can resort to enforcement measures. These include, for example, seizure of accounts or seizure of tangible assets.

How do I prevent as a crypto trader?

If you have not yet been contacted by the tax authorities in this round, had income from crypto transactions and have not yet declared these to the tax office, you should definitely have the possibilities of a voluntary disclosure checked.

We assume that the tax authorities will take further investigative measures and thus the risk of detection will further increase.

Based on the Directive on Administrative Cooperation (DAC8), an automated exchange of information between financial platforms and the competent tax authorities is being prepared. In addition, tax authorities are increasingly investing in training and specialized technologies to track crypto transactions more efficiently. Collaboration between authorities and tax experts is also on the rise, steadily expanding skills in the area of data analysis.