DeutschAttention: This article refers to taxation in Germany. Depending on your place of residence, the tax treatments differ: Here we summarize current data on the situation in Switzerland and Austria.
Cryptocurrencies are increasingly reaching the so-called mainstream. In view of the sometimes enormous returns for crypto investors and traders, the interest is all too understandable. In many countries, however, speculation with digital currencies is still in a kind of gray area. Reason enough to address the question: How does the German tax authorities deal with the topic of cryptocurrencies? Anyone considering entering the no less exciting area of mining should be sure to familiarize themselves with the tax treatment of income on the crypto market. Anyone in Germany who conceals profits must, in the worst case, expect problems from the responsible tax office. At the same time, the question arises as to whether and how losses from crypto transactions can be tax-deductible.
The truth is that despite the gradual emergence of uniform rules, even some authorities do not know how to deal with cryptocurrencies. In the next sections, we would like to shed some light on the matter.
| The first and probably most elementary tip from tax experts is:
→ Anyone who invests in cryptocurrencies should make sure from the beginning to document all transactions as well as possible and without gaps in proof! |
Consultation with specialized lawyers and tax advisors with experience in the subject is particularly recommended for beginners. This step is primarily advisable if transactions are not carried out via approved crypto exchanges.
What is the Legal Treatment of Cryptocurrencies in Germany?
Important for German investors regarding the topic of tax on cryptocurrencies is first of all the question of whether digital currencies are even legal in their home country. The answer is quickly found: Bitcoin, Ethereum and Co. can be legally bought and sold in Germany. This also applies if investors are interested in mining digital currencies. Anyone who wants to offer crypto services to customers commercially – for example, as an operator of a crypto exchange – must now apply for a corresponding license in Germany. For investors and thus taxpayers, the aforementioned legality clearly regulates that cryptocurrencies are tax-relevant. The legal basis for crypto trading with coins and tokens is § 23 Para. 1 No. 2 of the Income Tax Act (EStG).
This classifies transactions with digital currencies as so-called private sales transactions (PVG) and “other economic goods”. This results in taxation at the personal income tax rate of each taxpayer who makes profits with cryptocurrencies. As with many other financial products, the legislator provides for certain speculation periods when taxing crypto transactions in Germany. The period in question is currently (as of 04/2022) one year. Anyone who exchanges digital currencies such as Bitcoin or Ethereum into fiat money pays taxes – provided that sales are made before the expiry of 12 months after the acquisition. The regulation applies equally to the profitable exchange of one cryptocurrency into another.
| Important:
→ Crypto profits must be properly and promptly reported to the tax office as part of the (annual) tax return! A non-reporting discovered during the audit can, in the worst case, be considered tax evasion with penalties. |
The fact that new tax rules for crypto investments are controversial (especially among fans of the early days of the crypto market) does not change the tax consideration that is now in place.
Taxes on Cryptocurrencies in 2022
This is how the Taxation of Crypto Profits Succeeds
The reference to the classification of crypto holdings as “other economic goods” is particularly important for investors because it results in a different treatment by the tax authorities than is the case with shares, bonds and similar securities. Bitcoin and Co. are not considered official legal tender, but rather as “private money”. By comparison: Share profits are treated as income from so-called. The still relatively new legal situation for digital currencies comes with a certain advantage for crypto investors. The reason: The fact that a crypto profit is not considered a capital gain eliminates the otherwise usual withholding tax of 25%.
As mentioned, this regulation applies to privately made sales – both when exchanging between different digital currencies and when exchanging a cryptocurrency into a fiat currency such as the euro or Swiss franc. We emphasize again: Taxpayers are not exempt from the reporting requirement.
Private Crypto Investors Must Report Income and Know Deadlines
To understand when exactly you have to pay tax on private profits from crypto transactions depends, as mentioned above, primarily on the holding period. Anyone who keeps acquired coins and tokens in the crypto wallet (the digital wallet) for a year or longer does not have to pay tax on later profits. However, if you decide to sell early – i.e. before the expiry of the period in question – your income will be taxed on the basis of your personal tax rate.
However, there are some special features that taxpayers need to know. Basically, it’s about two essential criteria:
- The difference between the former acquisition costs and the realized sale price is taxed
- typical for “private sales transactions”: Investors benefit from an annual allowance of 600 euros
As so often when it comes to taxation, there is also an aspect here that every investor must know. What is meant is the difference between the “allowance” on the one hand and the term “tax-free amount” on the other. In this context, it is an allowance. It follows that your entire profit from crypto sales must be taxed if it is higher than the allowance. Even if the profit per year is only minimally above the limit. A tax-free amount, on the other hand, would mean that a certain sum x is basically tax-free and only sums above the limit are subject to tax.
The Right Place for Crypto Profits in the Tax Return
Anyone who prepares the tax return themselves enters their profits from trading in digital currencies in the “Annex SO”. Again, the note: This is exclusively about privately generated profits. The legislator provides for a different regulation for companies with commercial profits. On the one hand, the assessment as a private sale transaction is omitted for commercial trading, as expected. In addition, the one-year holding period for exemption from tax liability is also omitted here. Anyone who trades in cryptocurrencies as an entrepreneur taxes income via the regulations on business assets.
For private taxation, the tax authorities in Germany provide for two different ways. This is due not least to the fact that prices of cryptocurrencies on crypto exchanges are often subject to significant price fluctuations and at the same time different prices are set between different trading venues. The focus of taxation is primarily on the deduction of the sale prices from the price at the moment of purchase. When taxing cryptocurrencies and profits in Germany, the individual case decides which of the following two approaches is the right one. FIFO or LIFO method? Many German tax authorities prefer the former variant. Both ways deserve a closer look.
Model 1: the calculation of profits from crypto transactions using the FIFO method
The abbreviation “FIFO” stands for “First in – First out”. The background here is the assumption that coins and tokens first acquired in the wallet are also sold first again. This assumption is particularly advantageous for investors who acquired during a bull market, i.e. at the beginning of a phase of significantly rising prices, and use a sale to take stately profits.
Model 2: taxation based on the LIFO method
The LIFO method is basically the counterpart to the first-mentioned method. Accordingly, “LIFO” stands for “Last in – First out”. Here it is assumed that those cryptocurrencies are sold first that have most recently found their way into the portfolio.
| Attention:
→ Taxpayers can claim fees for wallets as well as for trading accounts with crypto exchanges and other trading platforms for tax purposes. |
Costs can therefore be offset (as, by the way, also losses from sales transactions) against booked profits during a tax year. Fees and losses should therefore also be stated in the tax return in the sense of an offset. Losses can be offset both with a view from the previous and subsequent year.
Does the Tax Office Accept My Transactions as Private Transactions?
A central question at the end is also that of acceptance on the part of the tax office when it comes to whether authorities recognize a profit as private. Investors who rarely trade in cryptocurrencies, correctly declare profits and generate comparatively low income have good prospects of recognition. The more transactions taxpayers declare and the higher the transaction volume, the more likely the crypto trading will be classified by the responsible clerks. The risk that purchases and sales will be classified as commercial trading is much higher if sales are made regularly before the expiry of the 12-month holding period. Finally, the special case of so-called Initial Coin Offerings (ICO) should be addressed. The tax assessment in this area is still difficult for many authorities. Therefore, it should be pointed out again how important professional advice is when investors regularly sell crypto reserves.
Last but not least, we would like to point out two points again at this point:
The consultation of an expert specialized in the topic in advance of the first transactions is urgently advised. Because even small errors or profits that are not correctly/completely reported carry the risk that the tax office in the worst case does not assume accidental false reports, but intent and thus tax fraud. This applies all the more to companies. Even more important, however, is that the preceding explanations are not to be understood as binding legal advice. It is a stocktaking of the current legal situation, which cannot and should not claim to be complete and correct. Also because the situation for the taxation of cryptocurrencies and profits in Germany as in many countries is still in a kind of finding phase.
The new federal government, which has only been in office for a few months, is increasingly dealing with the issue. The “traffic light coalition” could soon make further adjustments to the legal situation, which has so far been quite opaque for investors.
Other countries, other taxation:
Taxation of cryptocurrencies and profits in Switzerland
Taxation of cryptocurrencies and profits in Austria
Are you looking for a tool to support your correct tax return? Then we recommend Cointracking.
Ideal for your tax return in
- Germany ✔
- Switzerland ✔
- Austria ✔
- and many other countries ✔
We were able to put Cointracking through its paces. Here you can read the entire review of Cointracking
Finally, again the explicit note: The preceding explanations do not constitute binding legal advice. Anyone who already trades in digital currencies and generates income from sales transactions or plans to enter the market should definitely rely on the assistance of a tax expert. Ideally, these already have extensive experience in connection with cryptocurrencies. It is by no means the case that every tax advisor is now familiar with the topic of taxes on cryptocurrencies in Germany. The specialists also clarify in detail about special features and deadlines for the sale as well as special conditions with regard to the individual taxation of profits and losses.
