Taxation of bitcoin transactions by private investors

A sales transaction always exists when a bitcoin is exchanged for something else. This includes the sale of the digital currency for a fiat currency (for example, EUR or USD) or the exchange of one digital currency for another. This also includes the use of digital currency as a method of payment, meaning when the purchaser uses bitcoin to pay for goods or services. In these cases, a private sales transaction exists according to Section 23 (1) No. 2 of the German Income Tax Act (EStG).

Profits from the sale of bitcoins are taxable if there is less than a year between the purchase and sale. The tax laws allow private investors an exemption limit of € 600. Only if this limit is reached within a calendar year does the tax office expect to receive a share of the profits – and then taxes are due on the entire amount. If transactions remain under this limit, no taxes are due on the profits. But beware: the exemption limit of € 600 applies for all private sales transactions. However, if bitcoins are held for at least one year, then the capital gains are completely tax free. The capital gain is calculated as the difference between the realised sale price and the acquisition costs and income-related expenses for the digital currency that has been sold.

Tax liabilities from capital gains with bitcoin

If the purchase and sale of cryptocurrencies results in taxable income, there is an obligation to submit an income tax return. This is also the case if there was no previous obligation to submit a tax return. Individuals who are not represented by a tax advisor must submit this tax return by 31 May of the following year. If they do not, they face the threat of far-reaching consequences. These range from the imposition of a penalty for late filing to a fine or criminal proceedings if profits were not declared.

Cryptocurrencies are not subject to capital yield tax

In contrast to securities, trade in bitcoins is not subject to capital yield tax. While securities transactions are taxed at the favourable capital yield tax rate of 25 per cent, bitcoin transactions are taxed at the individual income tax rate. This is determined based upon the total taxable income and may be as high as 45 per cent. Additionally, the solidarity tax and, depending on an individual’s religious affiliation, church taxes will be due. In an extreme case, a tax obligation of approximately 50 per cent will be incurred.

Carrying forward losses from bitcoin transactions

Those who have less skill at buying and selling are less fortunate. Quite apart from the resulting losses, a reduction of taxes by offsetting other income from work, rent, etc. is not possible. However, these losses may be recorded and projected back one year or carried forward into future years to be offset against profits from other sales transactions. It is important to have these losses officially recognized for them to be used in this way in the future. In this case, an income tax return is also required.

Tax regulations for loaning bitcoins

There has been a recent trend towards investing in bitcoins, meaning loaning them. The resulting interest is also taxable.

Individuals who sell previously loaned cryptocurrencies can find themselves caught in an almost entirely unknown tax trap: If income has resulted from interest on a loan of bitcoins held by an individual, the time limit for private capital gains increases from one to ten years.

German taxpayers are subject to what is called the world income principle. It doesn’t matter to the tax office whether this profit was realised on an exchange in Germany, Singapore or elsewhere. A tax obligation results from bitcoin transactions in the jurisdiction where the investor or seller is subject to taxation. One should also not be deceived by the anonymity of bitcoin or the blockchain technology: Even if tax officials are reticent in official communications, they are monitoring activities in the area of cryptocurrencies.  

Missing guidelines

In the absence of binding statements from the tax authorities, we currently lack guidelines. The resulting open questions become especially relevant when, for example, private investors own multiple different wallets and have acquired bitcoins at different times for different prices. There have not yet been any binding statements about the order in which the taxation or non-taxation of profits should occur. We must also wait to hear how the tax authorities will treat the increasing number of hard forks, meaning the splitting of a blockchain into two separate blockchains, and airdrops, meaning the distribution of free tokens to the community. We thus urgently advise all owners of cryptocurrencies to record which transactions they have made when and at what price.

Private investors accordingly have until the end of May to determine whether their profits from engaging with bitcoin should also be shared with the tax office.

Outlook

This representation of the tax treatment of bitcoin and other cryptocurrencies with a similar purpose and function cannot be simply applied to other digital currencies, such as Litecoin or Bitcoin Cash. In the course of initial coin offerings (ICO), cryptocurrencies – also known as tokens – are increasingly being issued that resemble bitcoin in their design but may also grant the investor dividend payments, voting rights or an ownership fraction. These can in turn lead to a different tax assessment.