The term mining describes a process used to handle, secure and synchronize transactions. This is necessary to maintain a decentralized blockchain system. However, the process of mining requires computing power, which is why it is associated with high electricity costs. In order to compensate for this and to offer the miners an incentive for the activity, they receive compensation. The most popular example is the mining of Bitcoins (BTC). Here, the miners are paid shares of BTC in return for the computing power they provide. The more computing power they use, the higher the reward.
In order to understand how the rewards earned from mining are taxable, it is first necessary to get an overview of the different forms of mining. This is because they have different implications for tax liability.
Do you have to pay taxes on mining? For individuals who only mine occasionally, i.e., in a private capacity, taxability of the mined coins is questionable. In these cases, the cryptocurrency is created directly in the miner's assets due to the interaction with the blockchain. In our opinion, this increase in assets does not fall under any type of income of the German Income Tax Act (Einkommensteuergesetz, EStG) and is therefore not taxable. A later sale of these self-produced cryptocurrencies is also irrelevant for tax purposes due to the lack of a necessary acquisition process. This is because without acquisition, the private sale transaction pursuant to Section 23 (1) No. 2 EStG does not apply.
The BMF (Federal Ministry of Finance) takes a different tax view in its BMF letter on the taxation of cryptocurrencies. This considers Section 22 No. 3 EStG (income from other services) to be relevant for income in the private sector.
However, these taxes are only incurred if the exemption limit of EUR 256 has been exceeded in the calendar year. The BMF also affirms an acquisition process in this case. This has the disadvantageous consequence for the taxpayer that a subsequent sale of the rewards received must be taxed within one year. Due to the different tax classifications, it may be worthwhile in individual cases to take legal action against the tax assessment.
Many users also often ask themselves whether a business has to be registered for mining.
However, the occasional mining is usually quickly exceeded and thus a commercial mining exists. In this case, a business must be registered.
A commercial activity is carried out by anyone who participates in the general economic traffic sustainably, independently and with the intention of making a profit. The BMF explicitly assumes that mining can be private or commercial, depending on the circumstances of the individual case. However, it tends towards commerciality and handles a private classification rather restrictively.
In this case, the income from mining is income from business (§ 15 EStG). If miners purchase hardware specially designed for mining and always ensure that they mine the most profitable cryptocurrency in each case, they are likely to have commercial income. Miners should therefore be prepared that their mining income will initially be classified as commercial mining by the tax authorities. However, the costs for mining the cryptocurrencies are then deductible as business expenses. Under certain conditions, trade tax is also due.
Commercial activity requires self-employment. This is unlikely to be the case with many cloud mining offers, as the cloud miner often does not have access to the hardware. In most cases, they cannot make any settings or decide at will which cryptocurrency is to be mined.
If there is no commercial mining, however, taxation due to income from other services (Section 22 No. 3 EStG) is possible. Decisive for the taxation of mining is therefore the question whether an activity is carried out on a commercial scale or not. Here we have also compiled some information on the taxation of helium mining.
The distinction between commercial and other income depends on the circumstances of the individual case. It is therefore advisable to always have your individual concerns reviewed by a tax advisor or lawyer experienced in crypto mining and taxes.
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