Any purchase or sale of cryptocurrencies is basically a taxable transaction. Any person who earns profits from trading cryptocurrencies will, save for certain retention periods, be liable to pay taxes.
However, it would be unusual for a buyer to purchase all cryptocurrencies at once and then to also resell them at once. In most cases, the positions will rather be built up over a certain period of time and then be resold successively. In such case, the question arises as to how to calculate the profit or loss from individual sales transactions.
The so-called First-in, First-out method (FIFO) and the Last-in, First-out method (LIFO) may already be known to some investors from commercial law.
The FIFO-method assumes that the first goods purchased are also the first goods sold. The LIFO method, on the other hand, assumes that the last goods purchased are the first goods sold. Both methods can lead to considerably different results.
Assuming a crypto dealer has bought a bitcoin for EUR 1,000.00 in January. In November, he buys a second bitcoin for EUR 6,000. In December he sells one bitcoin for EUR 10,000. When applying the FIFO method, the dealer would have made a profit of EUR 9,000. When applying the LIFO method, the profit would have amounted to only EUR 4,000.
If, on the other hand, the first bitcoin had been purchased in November of the preceding year already, application of the FIFO method would have resulted in the sales profit being totally exempt from sales tax due to the retention period of one year. As a consequence, the determination of the most beneficial method always depends on the individual case.
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Contrary to commercial law, the relevant provision of § 23 of the German Income Tax Law (Einkommensteuergesetz; "EStG") assumes that that it is possible to individually allocate every good sold. The law explicitly requires application of the FIFO method for the sale of foreign currency amounts only. As cryptocurrencies are, by their nature, quite similar to foreign national currencies, a corresponding application of the FIFO method may seem appropriate.
However, in 1993 the German Federal Fiscal Court (Bundesfinanzhof; "BFH") decided that, in the absence of a legal directive, the purchase costs must be calculated at average values (BFH of 11/24/1993, X R 49/90, Federal tax Gazette II 1994, 591). In the above example, the average purchase price of the bitcoin would be EUR 3,500. The taxable profit would hence be EUR 6,500. Only goods that are sure to have been sold outside the speculation period are taken into account for the purposes of the average method. In this regard it is similar to the FIFO method.
So far, it is still unclear whether this case law also applies to cryptocurrencies. The legislator reacted at the time and legally mandated the FIFO method for the sale of foreign currencies. For cryptocurrencies, at least an analogous application could be considered. In its letter, the German Federal Ministry of Finance (BMF) also declares the Fifo method applicable for the purpose of calculating the holding period.
It is questionable whether, in the absence of a statutory order for the Fifo method, a calculation based on the last-in-first-out (LIFO) method permitted under commercial law can be considered. Particularly in the case of trading within the one-year period, this method can lead to more favorable results from a tax perspective. Due to the clear positioning of the BMF, it can be assumed that the application of the LIFO method will not be accepted, at least by the tax authorities. In this respect, legal action may have to be taken against the tax assessment notice in order to obtain a calculation based on LIFO.
The situation is different with the average method. Investors can rely on this method. In its letter, the BMF even expressly refers to the average method for determining the value.
As there are presently no further rulings or administrative orders, you should review in each individual case, which calculation method can be used to determine your profits. Our tax experts for cryptocurrencies will be pleased to discuss all possible structuring options with you to work out the best possible tax solution for you.
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