Hamburg tax office declares ENS and TNS airdrops taxable

The Hamburg tax office has decided that airdrops of the Ethereum Name Service (ENS) and the Terra Name Service (TNS) are taxable. However, this opinion has no normative binding effect for other tax authorities. It is at the discretion of each tax authority to take its own tax position. Our article sheds light on the details and implications.

The tax office presents the following argumentation:

The justification is based on the assumption that the recipients of these airdrops have provided a taxable service. This arises from the fact that they are holders of an .eth or Terra address, which should be regarded as a type of service or contribution to the network. The cryptocurrencies received as part of the airdrop (ETH for ENS and Terra for TNS) are regarded as consideration for this “service”, which, in the opinion of the Hamburg tax office, would make them taxable in accordance with Section 22 No. 3 EStG.

Our assessment of this:

From our point of view, there is no sufficient exchange of services between the person identified and the recipient of the airdrop in the present case.

Any action, toleration or omission that can be the subject of a contract for consideration and that triggers a consideration can be considered other services within the meaning of Section 22 no. 3 EStG. The decisive factor is that the consideration is “triggered” by the taxpayer’s conduct and that the performance and consideration are in a balanced relationship to each other.

The Federal Ministry of Finance (BMF letter dated 10.05.2022) itself assumes a tax-relevant exchange of services in particular if personal data is disclosed or a specific project is actively advertised on social networks (recital 70). However, in the opinion of the Ministry of Finance (para. 71, p. 1), what is done merely for the simple technical allocation or provision does not fall under the characteristic of an exchange of services.

ENS and TNS tokens were allocated to all users who had registered an .eth or Terra address. In our view, this action was not foreseeable at the time the addresses were set up and therefore cannot be regarded as an exchange of services. The subsequent claiming process also does not constitute an exchange of services for tax purposes. Although you had to link your wallet for this, which can be seen as an active action, this merely confirms the claim to the airdrops. This action is necessary for the simple technical allocation of tokens and does not constitute a service within the meaning of Section 22 No. 3 EStG.

What does this mean for recipients of airdrops?

According to the Hamburg tax office, the crypto income resulting from these airdrops is considered taxable income. The recipients of the airdrops may therefore be subject to considerable tax charges.

What are the consequences of this decision?

However, the opinion of the Hamburg tax office is not normatively binding on other tax authorities, which means that other tax offices do not necessarily have to adopt this interpretation. Each tax authority reserves the right to make independent decisions based on its own interpretation of the legal situation and the circumstances of the individual case. Nonetheless, this decision of the Hamburg tax office can be used by other tax authorities as an orientation aid or guideline in the assessment of similar circumstances.

This could have the following consequences for the taxpayers concerned:

  • They must calculate the exact income resulting from the airdrops and declare this in their tax return. This increases the administrative burden.
  • The tax burden could be unexpectedly high, which can lead to financial burdens.
  • This decision could set a precedent for the tax treatment of similar events in the cryptocurrency sector, potentially resulting in a broader and more accurate tax treatment of crypto income.

Conclusion

In summary, the opinion of the Hamburg tax office represents a clear position on the tax treatment of airdrops, which has significant implications for all crypto users. They must now evaluate their participation in such airdrops more carefully and consider the potential tax obligations.