Bettina BlassWhen the prices of Bitcoin, Ethereum and other cryptocurrencies skyrocket, it is tempting to sell part of the investment. After all, you then take a profit. However, those who act in this way often do not think far enough: because profits from an investment in cryptocurrencies are taxable. At least if you bought them less than a year ago.
Cryptos are “other assets”
Cryptos are not legal tender in Germany. “Just like gold, for example, they count as so-called other economic goods,” says Matthias Steger. The tax consultant in Potsdam has both a degree in finance (Diplom-Finanzwirt (FH)) and a degree in business administration. As a lecturer, he trains his colleagues and investors on the new topic of “Taxes and Cryptocurrencies.” This is especially important in the Berlin Brandenburg Tax Consultants Association. After all, Berlin is considered a crypto stronghold.
Personal tax rate plays a role
“With these other assets, there is a speculation period of one year. Anyone who sells earlier pays taxes on the profit accordingly. However, not in the amount of the final withholding tax of 25 percent,” says the expert. “It applies to shares and bonds. For other assets, on the other hand, the profit is subject to the personal tax rate.” This also applies when investors use cryptocurrencies as a means of payment, so one buys a product with cryptocurrencies. Then the price of the product corresponds to the sale price of the investment in terms of a speculative transaction.
Keeping records of purchases and sales
You have to be able to prove your capital gains to the tax office. This only works if you can prove all purchases and sales. An overview should be correspondingly precise. It is even more important if you regularly buy cryptocurrencies. Otherwise, you will lose track of what share of the digital currencies you have held and for how long. So, when selling twelve months after the first purchase, one part will be tax-free, the other not yet. Usually, the FIFO rule is applied here: First-In-First-Out. So: the cryptos you buy first are the first ones you sell.
Tip 1
Calculate the profit you report to the tax office as follows: Subtract the purchase price and any incidental expenses such as commissions from the cryptocurrency’s selling price. Enter it under “other income.” By the way, you could also declare losses. By doing so, you reduce the tax burden.
We fear that it will take another ten years or so until there is legal certainty with cryptocurrencies and tokenization.
Matthias Steger, tax consultant and graduate in business administration in Potsdam, Germany
Taxes on profits with tokenized valuables
Profits can also be made with the purchase or sale of tokenized real estate, wine, diamonds or classic cars. “The speculation period here depends on the object itself,” Steger explains. “Whether it is tokenized is irrelevant.” As an investor, you can follow these tax guidelines when tokenizing:
- As a rule of thumb, what can be moved has a speculation period of one year. So it applies to a car as well as in case of the tokenization of diamonds.
- Real estate, accordingly, has a different speculation period. Ten years apply here. Exception: The owner lived in the house or apartment himself at least in the year of the sale and in the two years before.
- Also in the case of real estate, speculative gains are not subject to the final withholding tax of 25 percent, but to the personal tax rate.
How to pay tax on private gains
Table on the taxation of cryptocurrencies and tokenized valuables
Investment type | Taxation | Allowance |
Shares, bonds | 25% * | Savers’ allowance: 801 euros |
Cryptos, tokenized assets, foreign exchange, gold, jewelry | Personal tax rate | 600 Euro from all private disposal transactions |
The tax traps of digital transactions
- Staking, mining and masternodes: In addition to income tax, business tax is also incurred when buying and selling under certain conditions. For example, if someone produces cryptocurrencies themselves, i.e. carries out mining. This is because the tax office usually assumes a trade in this case. The tax office can also assume a trade in the case of so-called staking (see box) and masternodes.
Tip 2
If you want to become active in staking, mining and masternodes, you should consult a tax expert beforehand. Otherwise, taxes incurred will reduce the expected return surprisingly quickly.
- When a group of investors becomes a GbR: According to tax consultant and certified financial economist Matthias Steger, who is acting plays a role in digital transactions. “For example, if a group jointly buys art tokens of ten paintings worth 100 million euros, this can be considered a gallery.” However, a gallery is a trade – with all the consequences that entails. And the group of investors, by acting together, becomes a civil law partnership, or GbR. There are duties associated with that. It plays a subordinate role how high the traded sums are.
Tip 3
Even if you can quickly buy art tokens via corresponding platforms: In this case, you should not act hastily just because it is possible. The possible consequences can be serious. Because the topic is complex, you should therefore talk to experts.
- Taking out a loan for tokenization is a commercial risk: “It is very dangerous if someone takes out a loan to invest in the tokenized assets,” says Steger. That’s because as soon as loans are involved, the jurisdiction assumes a trade. “It’s different when buying securities. No one counts as a commercial trader just because they buy securities thanks to a loan.”
Tip 4
As a private investor, you should never take out a loan to be able to invest. This applies to funds just as much as to wind turbines, containers or even tokenized assets. Should a total loss occur, especially with risky investments, you will still have to pay back the loan.
- Caution with tokenized real estate: There are also risks with real estate tokens. For example, to be considered a commercial property trader. “Then namely, if you sell more than three properties within five years,” says tax expert Steger. If the tax office assumes a trade and case law confirms this, profits from the sale of these tokens would be taxable. This could have far-reaching consequences: “It is still unclear whether the tax authorities will treat these tokens the same as real estate. If so, the question is whether the sales will be considered object-related or unit-related.” Property-based means all the tokens in a property at a sale are one count property. “Investors could file a request for binding information with the tax office. However, this is subject to a fee,” says the tax expert.
Tip 5Because so much is still unclear about the taxation of real estate tokens, you should inform yourself regularly to stay up to date. If you buy or sell a lot of tokens, it may make sense to set aside part of the return for later back taxes.
- Interest income on crypto loans: Lending or coin lending means that you leave parts of your virtual currency to someone else. The latter remunerates the transfer. As a result, you get additional units of virtual currency. It is therefore similar to a loan: if you lend money, you get interest. In such a case, the speculation period increases to ten years. The taxpayer has to pay tax on interest as “other income” according to section 22 number 3 of the Income Tax Act. However, here too there are different views and corresponding uncertainty.
Special case: taxing profits from NFT art
Things get particularly complicated in the area of taxation of sold NFT art: “This is still a completely new field,” says crypto tax expert Steger.
- To be sure, private sellers do not have to charge sales tax on the sale of an NFT artwork.
- And after a one-year holding period, they also don’t have to pay speculation tax on the sale.
“The question, however, is where the line is between private seller and commercial seller,” Steger says. If someone is considered a commercial dealer or gallery owner, they must charge sales tax on a painting, among other things.
The situation is similar when someone buys and sells virtual goods and makes a profit as part of an NFT game or a computer or mobile game. This issue is not new, however, but was first raised a few years ago in connection with Second Life, a virtual parallel world.
- In these cases, taxation is just as possible as the assumption of a trade.
- At least that is what a ruling (8K 1565/18) of the Cologne Fiscal Court says. The case is now pending before the Federal Fiscal Court (V R 38/19).
- Attorney Christian Solmecke explains the context in a video on YouTube.
Tax legal certainty only in a few years
Even if there are initial regulations, this does not mean that they are unchangeable. Especially in the case of cryptocurrencies, there will still have to be some changes: “In the canton of Zug in Switzerland, for example, taxes can be paid in cryptocurrencies,” says Steger. And in El Salvador, bitcoin is a means of payment. “That will also have an impact on Germany. After all, that makes cryptocurrencies a real foreign currency like the U.S. dollar or the yen,” says Matthias Steger.
Ultimately, the courts will probably have to provide clarity in many cases. It is true that the German Federal Ministry of Finance sent a draft with the classification of the terms to the highest tax authorities of the states in June 2021. “However, we fear that it will take another ten years or so before there is legal certainty in this regard,” says Matthias Steger.
Unclear tax situation – tips for investors
- Use the unclear legal situation to catch up on past tax years. If the investor has submitted the complete tax reports and the tax office assessed on this basis without reservation of the review, one can continue to sleep calmly. It would be wrong to hope for a better ruling in the future and do nothing.
- One should file an objection against every tax assessment with crypto speculation income, because currently some tax courts dispute that the taxation is constitutional. A free sample objection can be downloaded from the new Kyptosteuerakademie by tax expert Matthias Steger.
By the way: The EU is working on transparency rules for digital platforms. The aim is to ensure that profits generated by the sale of products or services are taxed fairly in the future.
What is my personal tax rate?
How high your personal tax rate is naturally depends on your income: On anything over around 58,000 euros, you pay the marginal tax rate of 42 percent. Top earners even pay 45 percent. Everything below an income of around 9700 euros is tax-free.
Tax significance of staking
Proof Stake, PoS or staking is an alternative to mining. Here, according to the tax authorities, the algorithm specifies which participant in a blockchain network is allowed to generate the next block. Whoever's turn it is earns money from the newly added block. According to the Federal Ministry of Finance, a staker may have income from other services. The virtual currencies created by staking are considered "acquired" and therefore justified a longer speculation period of ten years. However, there is no legal certainty in this regard as yet. Masternodes are a special form of staking. We have reported on staking in detail.
FAQ – Frequently Asked Questions
Yes. Anyone who does not hold the shares in cryptocurrencies for at least one year must pay tax on the gains at the personal tax rate. There is only an allowance of 600 euros per person.
There are a number of tax traps for investors: Those who do not observe the speculation period must pay tax on their profits. There can also be serious consequences if the tax office regards investors as traders because of their actions. Depending on the object, sales tax may also be due or tax may have to be paid on interest accrued.
No. The legal situation regarding taxation is still in its infancy and is disputed in large parts. It is possible that the new federal government will provide more clarity here. However, investors should inform themselves as early as possible and also seek advice.
