Taxation of Crypto Assets: Executive Summary
- Capital gains from crypto assets are tax-free for private investors if they are realized after a one-year holding period and do not exceed the threshold of a “commercial trade”. A precise definition of this threshold is still missing, which leaves uncertainties, for example in the case of indirect investments via funds.
- An extension of the holding period up to ten years in cases of crypto-staking or lending, which was initially announced by the BMF, is expressly not applicable.
- For proof-of-stake, the threshold for being treated as a commercial activity, rather than private asset management, is set very low for validators. This will engage the community.
- While the tax exemption after one year of holding is very pleasing for (passive) investors and the circular provides legal certainty in many current cases, it does not become a motor for innovations in the industry. For example, the circular is silent on NFTs.
The circular explains essential basics and terminology of the crypto space in detail. In addition to defining virtual currencies and tokens, the terms mining, staking, lending, airdrops, wallets, master notes, forks and ICOs are introduced and explained. This approach to create conceptual clarity is appreciatedeven though special cases will continue to require explanations in tax audits regarding the technical processes.
Crypto token always taxable asset
According to the BMF, each unit of a crypto asset represents a taxable asset that is attributable to the holder of the “private key”. Thus, each of these units is relevant for tax purposes and their sale or exchange – not only back into fiat currency, but also into another cryptocurrency – is always a tax-realizing transaction. Whether this opinion will be upheld will be decided by the Federal Fiscal Court (Bundesfinanzhof) in a currently pending case (IX R 3/22)
Trade crypto to crypto taxable
The BMF adheres to the taxation of the exchange from crypto asset to crypto asset. Germany is thus taking a path that is not shared by other EU countries, such as Austria or France, where tax is only levied when the asset is exchanged back into a fiat currency. However, the intended more precise taxation and theoretically greater tax fairness poses a practical collection problem for the tax offices, which in many cases will not gain any knowledge about crypto-to-crypto trading.
Threshold for a commercial crypto business continues to be unclear
The circular could not fulfil the hopes regarding a tangible demarcation between commercial trading in crypto assets and private asset management. The BMF refers to the definition for commercial securities traders. According to this, the purchase and sale of crypto assets by itself, even if it assumes a considerable volume and extends over a long period of time, is not yet sufficient for the assumption of commercial activity, “as long as it takes place in the usual forms, as is common with private individuals.”
This distinction, taken from securities trading, is only of limited help for crypto trading, which by its very nature has a different speed and for which there is not yet any customary practice among private individuals.
Private investments tax free after one-year holding period
For private assets (i.e. not held as a trade or business), the capital gain from crypto assets is tax-free after a holding period of one year. A view initially circulated by the BMF in June 2021 that certain typical patterns (staking, lending) could lead to an extension of the holding period for up to ten years has now been expressly abandoned.
For the determination of the capital gains, taxpayers may apply the first-in-first-out method (FiFo) or, at their own choice, the average method.
In addition, the BMF letter contains further guidance on the determination of the holding period and the determination of the capital gain in certain cases. In particular, the taxpayer no longer has to determine the “average value of three exchanges”, as originally required by the BMF, but it is sufficient to indicate the price on one trading platform. This provides greater legal certainty for the declaration of these transactions.
Crypto assets paid as wages
If employees receive crypto assets as part of their remuneration or can acquire such units at a reduced price, wage taxation as a noncash benefit is generally possible. Here, the BMF clarifies that, in their view, the posting to the employee’s wallet is the relevant inflowand valuation time, unless the promised crypto assets can already be traded or assigned to a third party before posting to the wallet. The listing of the paid-out units at crypto exchanges originally required by the BMF has now been abandoned.
Mining seen as a commercial acquisition
For the creation of a new block by way of mining in the so-called proof-of-work procedure, the BMF generally assumes a commercial activity for tax purposes. This may also apply to participation in mining pools, where the individual miners may be regarded as co-entrepreneurs for the commercial mining activity.
Newly created units are considered “acquired” for income tax purposes and must be accounted for accordingly. The classification as “acquisition” will have to be examined by the courts since the creation of new units lacks a derivative acquisition from a third party, which characterizes a taxable acquisition otherwise.
Staking ≠ Proof of Stake (Forging)
In the case of block creation in the proof-ofstake process, the BMF provides the following distinction. Validators (wording of the BMF: “forging”) generally generate commercial income. This should be different for delegators (wording of the BMF: “staking”), who achieve so-called other private income. The practical difference can be small in individual cases; under certain circumstances, both activities are initiated with a few minutes of effort per year only. However, the tax difference is significant, since in the former case the crypto assets used as well as the crypto assets generated are entangled commercially.