Depending on the investment objective, the taxation of the selected form of investment has a significant impact on the return obtained and also on the effort to be made within the personal income tax return.
Therefore, the various peculiarities of cryptocurrency taxation should be an important part of the investment decision. Fortunately, the rough framework for trading is defined in this country.
Taxable investors can obtain information in advance and make their own investment decisions within this framework.
Tax-Free Crypto Gains Thanks to Holding Period Regulation
In Germany, cryptocurrencies were classified as “other economic goods” according to § 2 I No. 7 EStG of income tax at an early stage. Therefore, the direct purchase and sale of cryptocurrencies represents a private sale transaction and the regulation according to § 23 EstG applies.
After that, individuals have to report the gains made with the annual income tax return and are then taxed at the personal income tax rate. Unless it has not fallen below the annual exemption limit for private sale operations of 600 euros of profit or the holding period of the coins sold has been greater than twelve months.
For most taxpayers, the one-year holding period should therefore be the main reason for buying and selling.
In the event of a sale, private individuals must first verify how long the coins have been held and, if necessary, calculate the income of the crypto business. The formula for the calculation is very simple; the selling price is reduced by acquisition costs and sales advertising costs.
In practice, however, fast driving leads to several challenges. The simplest is probably the selection of a calculation method. Although case law does not prescribe a calculation method for cryptocurrencies, in practice the first-in, first-out (FIFO) method has prevailed over the last-in, first-out method. (LIFO) or the average price method.
In other words, the coins that were bought first are also proportionally sold first in a sale. Only coins within the wallet in which the sale was made are considered. Determining and documenting acquisition and disposal costs is likely to be the biggest challenge. The more wallets and transactions that have to be used, the more complex this process will be.
Many crypto exchanges offer export functions for transactions and there are also early crypto monitoring tools, but there should be no way around manual entries and calculations. Even with control tools, the user must be able to create a technical interface (API) between their wallet and the tool, or they must import the transactions into the tool using table formats (eg CSV).
If the data is synchronized or imported, it is very likely that manual entries will also have to be made here, for example about the origin of the coins.
Fixed taxes on most crypto ETPs
Custody clients can also indirectly invest in individual cryptocurrencies using various financial instruments such as funds, futures or certificates. A common way for private investors are so-called crypto-ETPs, more precisely ETC, ETN and ETI, in one or more cryptocurrencies, with the aim of reflecting performance as accurately as possible.
In regulatory terms, these are securitized bearer bonds (certificates) and, therefore, derivative securities. Almost without exception, capital gains from financial instruments are subject to flat-rate taxation via withholding (25 percent), solidarity surcharge and, where appropriate, church tax and not the normal rate of personal income tax. In addition, the paying bank is required to withhold and pay the lump sum.
Recently there has also been a possible exception for some crypto ETPs, whereby withholding tax is no longer applied, but the regulations for private sale transactions.
The letter from the Federal Ministry of Finance (BMF) of May 19, 2022 (57) establishes: “If, on the contrary, the conditions of the contract/issuance stipulate that the issuer must invest almost all of the contributed capital in gold or another commodity, and there is only a right to delivery of the deposited raw material or a right to payment of proceeds from the sale of the raw material by the issuer, there is no capital right within the meaning of Article 20, paragraph 1 , number 7 EstG (income from capital goods), but a claim for benefits in kind can be considered, if necessary, taxed as a private sale transaction under Section 23 (1) sentence 1 number 2 EStG.
Accordingly, issuers can initiate a change in taxation after examining the conditions of the contract/issue, after which the final withholding no longer applies and the investor is henceforth liable for taxation.
This means that if these crypto ETPs are sold, the bank will forward the entire sale proceeds to the investor and no withholding tax will be withheld. As with the direct purchase of cryptocurrencies, the investor must now apply the regulations on a private sale transaction in accordance with Section 23 EstG.
Special cases are also regulated thanks to the BMF
In addition to taxing income from the purchase and sale of cryptocurrencies, other sources of income such as mining, staking or loans are also possible.
The proportion of users of these forms of income is still comparatively small, which is why this article does not go into the specifics, but points out that the BMF also issued guidelines for the tax treatment of these cases at an early stage, thus creating an area legally safe for all actors.
For individuals with tax doubts, it is always advisable to take a look at the BMF website in addition to tax advice. With the letter dated May 10, 2022 on the handling of staking and lending and the associated statement from Parliamentary Secretary of State Katja Hessel, the BMF made it clear that it would respond to relevant developments in the crypto industry and its participants in an early stage and in a timely manner: “Of course, the next official publication of the BMF letter is not the end of our discussion on the subject, but an intermediate result. The rapid development of the ‘crypto world’ ensures that we do not run out of topics.”
You can also read this article in the current BTC-ECHO magazine, in which we shed light on the tax issue in a large number of articles.
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