Crypto, NFT, virtual currencies and other tokens: what does the current BMF letter say?

The new BMF letter “Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von sonstigen Token” has meanwhile also been published. Below you will find my brief and initial assessment of the letter of the Federal Ministry of Finance (BMF).

Our expert Dr. Christopher Arendt answers important questions about this. Read more here.

Crypto, NFT, virtual currencies and other tokens

Since we have specialized in particular in tax advice in connection with NFT’s, we regret that the BMF letter unfortunately does not provide for a separate scope of application for NFT’s. 

Indisputably, there are many specifics to consider in this area that also have a tax indication. Therefore, many questions regarding taxation in the field of crypto remain unresolved. This is especially true for the area of NFT’s.

The essentials at first glance (not conclusive) attached:

All operations in the crypto world can have a tax relevance

It remains the case that all acquisition and exchange transactions carried out in the crypto world remain tax-relevant in the view of the Ministry of Finance. All transactions within the wallet must therefore be considered and assessed for tax purposes.

The approach of assuming tax relevance only when the “cryptocoins” are exchanged from the wallet back into fiat has apparently not caught on with the tax authorities.

10-year holding period falls (for the time being?)

First of all, it is nice that the 10-year holding period disappears, at least according to the view of the administration. I.e. all tokens held as private assets can be sold tax-free after one year, regardless of their use.

I am curious to see whether this will stand, because the tax exemption has the downside that any losses over the annual period can no longer be claimed. It is quite conceivable that taxpayers will sue for tax recognition of their losses on the 10-year holding period.

Separation between private and commercial business remains difficult in individual cases

Writing does not. Since mining and forging continue to be considered commercial activities, the tax question arises as to whether one can still hold tokens “in private” at all in addition. Determining the scope of the business for tax purposes does not only entail tax risks for co-entrepreneurs.

In this respect, at any rate, the related tokens are exempt from the one-year speculation requirement and are always subject to tax consideration.

New possibility of determining the sequence of consumption

In any case, the determination of the capital gain also via the “average method” instead of the first-in-first-out method (FiFo) is to be understood as a relief. In this respect, there is now a right of choice for the taxpayer. 

This is also of great importance for the NFT market, where the acquisition of cryptocoins (Ethereum) is regularly only a stopover (albeit a fiscally significant one).

Tax problems of the airdrops

In the case of airdrops, the tax authorities now assume that the “drop” is a tax-relevant transaction. In any case, the linking of a wallet is seen as sufficient “participation” for the allocation under other income (Section 22 (1) no. 3 EstG).

The airdrop received is then to be determined with the market value, which raises quite significant questions about its determination (not only in the NFT area). As a consequential effect, the airdrop is then also subject to the one-year speculation period. In these cases, the airdrop can only be sold tax-free after a one-year holding period.

This allocation entails a major tax risk, because if the price of the airdrop collapses after allocation and the airdrop is sold within the one-year period, loss offsetting (receipt: airdrop = gain, airdrop sale = loss) is ruled out due to the different types of income (22 (1) no. 3 sentence 3 EStG).

Documentation requirements 

Regrettably, there are no concrete indications from the Ministry of Finance in this regard. However, it is expected that a further letter will address this issue separately.

I will be happy to keep you up to date on this.

Best regards Christopher Arendt