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UPDATE - Federal Fiscal Court rules: Profits from cryptocurrencies are taxable

We recently reported on the Federal Fiscal Court's (Bundesfinanzhof, "BFH") oral hearing on the taxation of cryptocurrencies Bitcoin, Ethereum and Monero. The BFH has now issued the eagerly awaited ruling: Profits from the sale of cryptocurrencies are subject to income tax as "private sales transactions" (BFH, ruling dated February 14, 2023 - IX R 3/22).

Key points of the ruling

  • Cryptocurrencies constitute "other economic assets" within the meaning of Section 23 (1) sentence 1 no. 2 of the Income Tax Act (Einkommensteuergesetz, "EStG"). In the opinion of the BFH, the term "economic asset" includes, in addition to things and rights, also actual conditions as well as concrete possibilities and advantages, the obtaining of which a taxpayer incurs a cost and which are accessible to a separate independent valuation according to the common understanding. These conditions are met in the case of cryptocurrencies, as Bitcoin, Ethereum and Monero in particular function as means of payment from an economic perspective and have a market value. The technical details do not play a role for the property as an economic asset.
  • Profits generated from the sale of cryptocurrencies are subject to income tax if they are acquired and sold within one year.
  • Exchange transactions within wallets or exchanges (e.g. exchange of Bitcoin for Ethereum or FIAT) are treated equally to acquisition and disposal transactions.
  • There is no structural enforcement deficit. There are neither opposing collection rules that prevent taxation, nor are there indications that the tax authorities are unable to determine and record profits and losses from transactions with cryptocurrencies. The BFH considered the proceedings in which the investigative measures, for example by means of collective requests for information by the tax authorities, did not lead to success as "individual cases" that do not justify a structural enforcement deficit.

Advisor's note and outlook

The BFH's decision now gives (private) crypto investors certainty in dealing with the taxation of cryptocurrencies - at least with regard to the assessment of capital gains within the one-year speculation period.

For tax purposes, the BFH did not have to assess, for example, the question of the acquisition of cryptocurrencies in connection with the creation of blocks by means of "mining" or "forging". The BFH also did not have to decide on the question of when income from commercial operations exists. In such cases, it is highly advisable that crypto investors and tax advisors carefully check whether income generated from this is subject to taxation, as there are also no fiscal court decisions. The tax authorities comment in detail on the aforementioned and other individual questions regarding the income tax treatment of cryptocurrencies (BMF letter dated 10.05.2022).

For practice, this means the following:

  • Profits and losses from crypto trading within the one-year speculation period must be declared as income from private sales transactions, as otherwise the non-declaration could be prosecuted as tax evasion.
  • In view of the enormous increase in popularity of crypto trading in the past and the resulting tax revenue potential for the tax authorities, the tax authorities will increasingly request investor data from crypto exchanges as part of a collective information request - and thus drastically increase the probability of detection for undeclared gains from cryptocurrencies. Anyone who has not yet been targeted by the tax investigation should therefore act quickly and subsequently declare gains within the scope of a voluntary self-disclosure with exemption from prosecution, as otherwise the ground for exclusion of the offence of discovery is threatened.
  • In view of the price losses of most cryptocurrencies last year, losses can be realized in a tax-effective manner: the loss is only offset against gains from other private sales transactions (e.g. real estate, precious metals or works of art) in the same year. If no other private sales transactions have been made in the year in which the crypto losses were incurred, the losses must either be carried back (loss carryback) or carried forward (loss carryforward). The loss carryback can only be claimed for the preceding year if profits from private sales transactions were generated there. Losses carried forward can be carried over into the following years without restriction within the type of income.

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