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Cryptocurrencies: How private investors taxes profits correctly in Germany

More and more people invest in Initial Coin Offerings (ICOs) by buying cryptocurrencies. While gains on stocks and securities are subject to capital gains tax, other regulations apply in the digital world. With these advices the tax declaration succeeds.

Entrepreneurs use ICOs to finance their business idea. For this they create new cryptocurrencies that investors can buy to support a project. In this way, new digital currencies have been created in recent years – there are now over thousand different ones. The value of money in circulation is currently over 300 billion US dollar (on 03/22/2018, source: coinmarketcap.com).

The height flight of well-known cryptocurrencies such as Bitcoin, Ether or Litecoin brought in a short time profits in millions for private investors. But: If you make profits, you have to pay tax on them – whether they are fluttering in on paper form or lying on a digital wallet.

How do retail investors tax digital profits?

The Bundesministerium für Finanzen (BMF) (Federal Ministry of Finance) doesn’t allocate digital money to traditional financial instruments – and that also makes the difference in terms of taxation. “Cryptocurrencies like Bitcoins are currently not recognized as official currency. […] These are other (incorporeal) assets ” – better known as so-called intangible assets.
There are two scenarios for the income tax treatment of cryptocurrencies in private wealth:

  1. The interest-bearing investment: This case occurs when, for example, someone lends his coins to another person and receives interest (e.g. in form of coins). In that case, digital money is a commodity and considered as a capital asset. Capital gains and changes in value are subject in this case to special tax rate of 27.5 percent.
  2. If there is no interest-bearing investment, cryptocurrencies are regarded as speculative objects: here a tax liability exists only if the period between purchase and sale is less than one year. Profits from the sale of digital private wealth are therefore tax-free if more than one year has passed since the acquisition.

Trading and selling of digital money

As with classical currencies, cryptocurrencies can also be exchanged for other crypto or fiat money (such as euros or US dollars). For private investors of cryptocurrencies, a sale of a private property (in this case coins) always involves a private sale (§ 23, para. 1, EStG). In principle, there is always a tax (exception: between purchase and sale is more than a year).

When exchanging assets, the purchase price and the selling price are relevant at a certain point in time. So if you keep a cryptocurrency that you have bought at different times in a digital wallet, the rule “First in first out” (FIFO) comes into play for the sake of simplicity. This means: If you want to sell a part of your coins, the value or the daily rate of the first money you buy is always valid. To keep an overview, it’s therefore advisable to note this information and to keep associated documents for the tax office:

  • Point of time: When did I buy the currency?
  • Quantity: How many tokens?
  • Daily rate: At what price?
  • Place: On which stock exchange?

Which tax do I use?

The profit from an exchange or sale transaction results from the difference between the acquisition and the sale price. If this must be taxed, e.g. because you want to sell the currency before the end of the year, the personal tax rate plus solidarity surcharge applies (and possibly the church tax rate). This tax rate is the average income tax rate for total income – calculated as follows: paid income tax x 100 / taxable income = tax rate in percent.
By the way, the expenses incurred (e.g. cost of a wallet) can be deducted from the tax – as well as losses from crypto transactions. This means that the losses can be offset against profits from other private sales transactions (not just crypto gains) in the same year, in the previous year (loss return) or in following years (loss carryforward). In addition, all sales transactions are exempted by 600 euros. Note: If the profit is 601 euros, the entire profit must be taxed; at 600.99 euros, the taxpayer may round off and doesn’t need to pay tax to the tax office. If you make your own tax return, select SO (for other income) to include cryptocurrency, and at best fill it out even if there is tax exemption to ensure complete transparency for the tax office.

Taxation of mining

Even mines (mining of crypto money) must be taxed. In the moment when the coins appear on the wallet. This is also the time when you could exchange digged coins for the first time in fiat money. The exchange process is then no longer coin for coin, but computing power for coin. The statement of the BMF says: “If cryptocurrencies are created (“mining”), there is basically a commercial activity, which entails corresponding tax consequences. The creation of cryptocurrency is treated no differently than the production of other assets.”
If miners divest their coins within the first year of generating them, they must pay tax on them at a 25 percent capital gains tax (and not personal income tax rate).
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