Unlike the euro (considered fiat money), Bitcoins and other cryptographic currencies are not legal tender. A legal obligation to accept Bitcoins therefore does not exist. Whether a seller of goods or services wants to accept Bitcoins is thus purely a question under private law, which the seller can and must answer on his own. Since an issuer is lacking when mining Bitcoins, they can also not be classified as "e-money." BaFin clarified this unambiguously most recently on December 19, 2013. For the tax treatment of Bitcoins this means that they must be treated as ordinary intangible assets – at least for purposes of income tax law. The specific tax questions of Bitcoin transactions continue to be dependent on whether the transactions are made in the private domain or in the business sphere.
VAT Treatment of Bitcoins in Germany
On February 27, 2018, the Federal Ministry of Finance (BMF) has clearly expressed its legal position on the VAT treatment of Bitcoins. Referring to the ECJ’s judgment, the tax offices will – from now on – have to treat transactions in Bitcoin and other cryptocurrencies as VAT exempt. Learn more...
A sale could be the sale of Bitcoins for euros via a trading platform. However, the use of Bitcoins as a means of payment also constitutes a sale, if the Bitcoin owner uses Bitcoins to pay for the acquisition of goods and services. In both cases, private sales transactions– also known as "speculative transactions" – exist within the meaning of Section 23(1) no. 2 of the German Income Tax Act.
For tax purposes, the classification as an object of speculation means that capital gains are completely tax-exempt after a holding period of at least one year. If the sales transaction is made within the one-year holding period, at least a tax exemption limit of EUR 600 p. a. is effective – the tax exemption limit applies, however, to all private sales transactions in the relevant year, therefore relates not only to Bitcoin transactions of the taxpayer.
The capital gains subject to taxation arise from the difference between the sales price achieved and the acquisition cost and advertising cost of the Bitcoins used (for example, purchase price of the previously acquired Bitcoins or cost for the mining of the Bitcoins). Corresponding losses can be offset and can also both be carried back as well as carried forward in future years and can thus be offset against profits from private sales transactions. In determining the acquisition cost, the problem frequently arises that the Bitcoins used were acquired at very different times at different prices / acquisition cost.
The first-in-first-out-method (Fifo) may be suitable in these cases for determining acquisition cost reliably (see on foreign currency transactions Bavarian State Office for Taxes of March 12, 2013, S 2256.1.1-6/4 St32). In other words: It can be presumed that those Bitcoins, which were first acquired / mined, are also those, which are first used in the course of a private sales transaction. Since the Fifo method is no longer expressly legally regulated with the introduction of the flat rate withholding tax, investors should carefully document their Bitcoin transactions in order to be able to submit suitable proof to their revenue office in case of doubt regarding transactions carried out. The usual individual income tax rate is taken as the basis for the tax rate. The flat rate withholding tax therefore has no significance according to German tax law.
Commercial companies cannot – unlike private investors – make private sales transactions. Transactions with Bitcoins, which are part of their business assets, lead instead generally to earnings from business according to Section 15 of the German Income Tax Act. A minimum holding period, after the expiration of which tax exemption arises, does not exist in this case. Depending on the legal form of the company, the profits generated in this way are then subject to income tax (partnership) or corporate tax (limited liability company (GmbH), public limited company (AG), etc.). In addition to the income tax effects of Bitcoin transactions, however, above all their value-added tax treatment is of particular interest to companies.
It is particularly troublesome for companies accepting Bitcoins as a means of payment that the tax authorities regularly treat the later sale of Bitcoins via a trading platform as an ordinary delivery subject to VAT. Whether this way of handling such transactions is correct, is at least questionable: According to a judgment of the European Court of Justice, the pure purchase and sale of securities in a company is not at all a business activity and thus not taxable. Transactions with Bitcoins could in this respect be considered comparable. Also in regard to tax exemption in connection with Bitcoin transactions, the German Federal Ministry of Finance has already expressed its opinion: The trading of Bitcoins and the procurement of Bitcoin sales is subsequently not for example exempt from the value-added tax according to Section 4 no. 8b of the German Value-Added Tax Act, since Bitcoins are not legal tender. In individual cases, however, at least in the opinion of the German Federal Ministry of Finance, tax exemption may result from Section 4 no. 8c of the German Value-Added Tax Act.
This provision exempts sales "in transactions with receivables" as well as the procurement of these sales. Unlike the sale of Bitcoins, transactions, which are used merely for the pure payment of a fee, should not be subject to value-added tax according to a statement by the German Federal Ministry of Finance, therefore the use of Bitcoins as a means of payment (therefore, for example, for the acquisition of services or goods) is not taxable according to Section 1(1) of the German Value-Added Tax Act. If it is assumed that Bitcoins are ordinary assets and not money and in a "payment process" Bitcoins are exchanged for other goods and services (which normally triggers value-added tax on both sides), this statement is surprising at first glance. The value-added tax law in many cases does not, however, strictly follow the income tax law. Therefore, it may be correct to treat Bitcoins at least as a "fee" for value-added tax purposes. In fact, the entrepreneur, who uses Bitcoins as a means of payment pursues no economic interests beyond the pure payment of a fee. Already in 1969, the German Federal Finance Court had decided that in such a case no value-added tax is accruing. Hence, he value-added tax treatment of Bitcoin transactions has only been partially clarified in a satisfactory manner to date. Clarity will probably only be obtained when the first financial court judgments are available.
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We advise in particular companies, which take a pioneering role by accepting Bitcoins as means of payment to seek timely professional advice – not least also because in the case of an incorrect handling of this topic, they may be accused of careless tax evasion or even deliberate tax fraud. Each entrepreneur can and must know no later than with the now published statements of the German Federal Ministry of Finance that a tax on the sales of Bitcoins is under consideration.
On the other hand, it can not be the patent remedy, either, to account for and to pay for all relevant Bitcoin activities for reasons of precaution out of "anticipatory obedience". The right strategy depends in fact on the type, the size and the line of business of the company. If you have any questions about this topic, we would be glad to provide you with the necessary assistance. Our range of services includes not only legal representation; as a full-service law firm we also offer the complete spectrum of tax advice. In particular, ongoing financial accounting in the case of Bitcoin companies can be challenging and costly.
Your contact persons for all questions related to the taxation of bitcoin and other cryptocurrencies are
- Attorney Benjamin Kirschbaum,
- Tax Advisor Jürgen Schwendemann,
- Attorney Philipp Hornung,
- Business Lawyer Eva Wohlgemuth, and
- Tax Assistant Erik Stephan.
You can reach us by e-mail (email@example.com) or by phone (+49 (0)69 76 75 77 80).
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