At least one rule when it comes to cryptocurrency income taxation is simple: Anyone who has held Bitcoins or other cryptocurrencies for more than a year can profit from price changes tax-free, no matter the amount. Within the first 12 months after the purchase, the profit cannot exceed 599.99 euros; thereafter, taxes must be paid. However, it is doubtful that this regulation will continue to apply for long, because there are expected to be separate tax laws for crypto transactions from 2022.
Cryptocurrencies are currently considered “other economic assets” for tax purposes and are taxed accordingly. In the language of the tax office, the purchase and sale are called “private sales transactions”. That is why (almost) all private crypto investors know the SO attachment for “other income” – this is where profits are entered. But if you invest in multiple currencies, buy and sell more frequently, and possibly through different wallets, you’ll find it difficult to file the best possible tax return with Excel spreadsheets and screenshots of rates on specific dates.
The legislator does not yet have proposals for fixed tax laws
Currently, individual tax offices have discretionary powers, in addition to the basic regulation of holding periods. The financial courts are primarily awaiting a decision from the Federal Tax Court in Munich, which will likely be used to clarify many issues related to the taxation of blockchain-based offerings in a binding manner next year.
At the same time, a uniform formulation of a crypto tax law is taking place at the EU level. Because, to cite just one example, it is currently unclear whether digital means of payment like Bitcoin should be taxed in the same way as the smart contract tool Ethereum. Will bitcoin transactions be treated like forex transactions in the future, but will ethereum transactions be treated like commodity transactions?
The courts do not hide the fact that many things are not clear: “The legislature is not obliged and cannot immediately react to every (technical) innovation in a regulatory manner. You have a wide margin of discretion and you can wait for your first development first. In terms of tax equality, it only has to react when serious offenses are manifested”. (Baden-Württemberg Finance Court, judgment of June 11, 2021).
Is Bitcoin running too fast for the courts and traditional tax advisors?
The Federal Tax Court in Munich has a lot to do, because not only questions about the profit and loss of transactions need to be clarified with legal certainty. Another topic: Cryptocurrency mining or prospecting. The purpose of mining is to make a profit: tax experts currently assume that these profits should be taxed as income from a commercial enterprise (Section 15 EStG) (draft letter from the Federal Ministry of Finance dated June 17, 2021). A solid legal basis is still missing.
It is not just courts and tax offices that have been overwhelmed by the skyrocketing rise of blockchain technology. Long-established and tradition-conscious tax advisors and tax offices face challenges that may be too great in many cases.
Perfect documentation of all crypto transactions is mandatory
If the courts and the tax offices themselves point out that there is still no legal basis for the taxation of crypto transactions, only one thing helps: be perfectly prepared for all the laws, rules and regulations that are coming so as not to miss any opportunities and avoid risks. The change in holding periods, the raising or lowering of exemption limits, the different treatment of different currencies, or the classification of mining profits – these are all issues that a taxable crypto investor will no doubt have to deal with. deal with in the years to come. This can result in higher taxes, but also great opportunities.
It is clear that tax authorities will always expect meticulous documentation of all transactions. Germany is no exception: all European countries will make similar decisions, loopholes for Bitcoin earnings must be avoided at the EU level. In the age of digital nomads working all over the world and financially independent big winners of crypto development, accountants and digital tools must have strong international competition that goes beyond the borders of Europe.
Tax evasion: cells instead of dream vacations
Tax evasion is only considered a little story by naive contemporaries. After all, anyone who hides profits from crypto transactions from the tax office is treated the same as any other tax evader: in particularly serious cases, he must be exchanged from a prison cell for up to 10 years, provided that Internet works. there. This draconian penalty (Section 370 of the Tax Code) is rarely imposed, but painful fines are the norm for tax evasion, and high interest rates and late fees are also incurred.
Tax investigation goes beyond the legislature: IT forensic experts track transactions despite encryption on computers, and information requests from tax police to a crypto exchange are often answered. No ambitious stock trader wants to be blacklisted by the German authorities, because that means being stigmatized throughout Europe.
What should not be overlooked: The old saying “Ignorance does not protect from punishment” is particularly true, as the Federal Tax Court has made clear. Even if there are doubts about what and how much is taxable, the person concerned should consult with the responsible authorities. Tax sins expire after 5 years minimum (sometimes only after 10 years); this also answers the question of how long all the documentation must be available at all times: date of purchase and sale, purchase price, the exact amount, the corresponding stock exchange or platform, the sale price with the most specific calculations possible.
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