Crypto Assets and VAT: What you need to know

The trading of cryptocurrencies continues to grow steadily in Germany – and as a result, the tax implications of digital assets are moving increasingly into focus. In particular, the VAT treatment of Bitcoin, Ethereum and other crypto-assets frequently leads to uncertainty.
We provide you with a basic overview of the most important rules relating to VAT and crypto.

General principles of VAT treatment of crypto-assets

In Germany, cryptocurrencies are generally regarded as financial instruments for VAT purposes. As a result of this classification, transactions involving the trading, exchange or use of cryptocurrencies are not subject to VAT as a general rule.

This means in practical terms that when you buy, sell or use Bitcoin or other cryptocurrencies as a means of payment, no VAT is generally charged. This treatment is largely based on a 2015 ruling by the European Court of Justice (ECJ) in the so-called Hedqvist case. The ECJ held that the exchange of Bitcoin into traditional currencies such as euros is exempt from VAT, as it constitutes a currency exchange service that benefits from VAT exemption. Since then, this case law has formed the basis for the VAT treatment of cryptocurrencies throughout the EU, including Germany.

Guidelines of the German Ministry of Finance (BMF) on VAT and Crypto

The BMF letter dated 27 February 2018 explains the VAT treatment of cryptocurrencies with reference to the ECJ’s Hedqvist ruling described above. According to the guidance, Bitcoin and comparable virtual currencies are treated as equivalent to legal tender, provided they are accepted by the parties as an alternative, contractual and direct means of payment and are used solely for payment purposes.

More specifically, the guidance states the following:

Exchange of cryptocurrency and use as consideration

The exchange of traditional currencies (e.g. euros) into cryptocurrencies (e.g. Bitcoin) and vice versa constitutes a taxable service which is exempt from VAT under section 4 no. 8(b) of the German VAT Act (UStG). This means that no VAT is charged on these exchange transactions.

However, this VAT exemption also excludes the right to deduct input VAT on any related services.

The BMF thus confirms the ECJ’s case law, according to which cryptocurrencies such as Bitcoin are treated in the same way as traditional money for tax purposes when they are actually used as a means of payment.

The guidance also clearly distinguishes between cryptocurrencies and virtual in-game currencies, which do not fall under this regulation.

Is VAT charged on Mining?

Mining is regarded as a non-taxable activity. It is a decentralised, algorithm-based process that secures the blockchain and prevents the double-spending of Bitcoin.

Miners do not supply a service within a reciprocal exchange with an identifiable recipient, which is a requirement for VAT liability. Remuneration in the form of newly created Bitcoins or voluntary transaction fees therefore does not constitute consideration for VAT purposes.

What applies to providers of Wallets?

The mere operation of wallets, which serve as digital storage for cryptocurrencies, is not regarded as an independent service for VAT purposes if no additional service is provided.

The use of the wallet itself is therefore not subject to VAT, as it constitutes pure safekeeping.

Are operators of crypto platforms subject to VAT?

There was initially considerable discussion regarding the VAT treatment of operating crypto trading platforms (e.g. exchanges). The 2018 BMF letter clarified that the exchange of crypto into traditional currencies and vice versa is exempt from VAT. However, the intermediation of such transactions by platforms may in principle constitute a taxable service.

In 2021, the BMF (BMF letter dated 03.05.2021 – III C 3 – S 7160/20/10003 :001) revised its previously restrictive position on the VAT liability of trading platforms. It now allows, under certain conditions, the application of the VAT exemption for financial services (section 4 no. 8 UStG) to services provided by various crypto platforms – both centralised (CEX) and decentralised (DEX).

Technical infrastructure services that platform operators provide to facilitate trading may constitute ancillary services, which can also be VAT-exempt if they are closely connected to the principal service. Other technical or material services provided to platforms, however, remain subject to VAT.

VAT and Crypto: Act in good time

The VAT treatment of cryptocurrencies in Germany has been largely clarified by the 2018 BMF letter. However, many sources of income within the crypto ecosystem are not covered by this guidance. In addition, there is still a need for clarification in relation to the place of supply, entrepreneurial status and the applicable VAT rate in certain scenarios involving crypto.

For a legally compliant and tailored solution, you should therefore rely on our professional crypto tax advisory services for businesses. Please feel free to contact us to ensure that your crypto strategy is optimally structured from a VAT perspective.