13 years of cryptocurrencies, first communication by the Federal Ministry of Finance
13 years after the first Bitcoin block was mined and around 20,000 cryptocurrencies later, the fiscal authorities have for the first time issued a Ministry communication on the income tax treatment of cryptocurrencies. Given their current volatility, the income tax treatment of these virtual currencies may not be at the top of the agenda. Against the background of their increasing relevance, at the latest in the context of the next tax return, it is, however, more than encouraging that for the first time there is now a uniform nationwide pronouncement and thus principles binding on the public administration.
The draft on which the final Ministry of Finance communication is based was first issued in June 2021, but did not undergo any changes for a considerable time even following initial criticism. The change of leadership in the Federal Ministry that has taken place in the meantime has possibly played a key role in the modifications that were considered unlikely for a lengthy time and which have now been made to the final communication.
Income tax treatment of cryptocurrencies in the view of the fiscal authorities
The fiscal authorities have followed the prevailing opinion and have made trading in cryptocurrencies subject to regulations applying to private sales transactions. Accordingly, these are only subject to taxation if there is less than one year between the acquisition and sale. In view of recent price fluctuations, it should also be noted that losses from the sale of cryptocurrencies can only be offset against corresponding capital gains. A reduction of other income is not possible.
The criteria applicable to trading in commercial securities and foreign exchange are to be applied to distinguish crypto traders from commercial traders. Generally speaking, the assumption of a commercial activity will therefore be ruled out and only come into play in absolutely exceptional cases.
Particularly welcome is the change made to the draft version with regard to a possible extension of the period of speculation. Up to now, the period of speculation was to be extended from one to ten years, particularly in connection with lending and staking activities as well as airdrops. In the new communication, the tax authorities have clearly established: No extension of the speculative period is possible! The wording used in the communication here is unfortunate, however, as it could exclude some cryptocurrencies (especially utility and security tokens) from this statement of principles, although this may also merely be an editorial oversight. In any case, no grounds for differentiating between cryptocurrencies can be found either in the Ministry communication or in the discussion on this topic in the literature to date.
Income from lending, staking and airdrops for which services are rendered (this also includes the provision of personal data) is taxable as other income under section 22 no. 3 of the German Income Tax Act (EStG). Special attention must also be paid to income from mining and active staking (referred to by the Federal Ministry of Finance "forging"), i.e. participation in the network as a block producer (also referred to as "validator"). In the opinion of the fiscal authorities, this usually generates commercial income within the scope of section 15 of the German Income Tax Act (EStG), which means that cryptocurrencies generated in this manner lead to business income, so cryptocurrencies used in forging are deemed to be part of business assets for tax purposes.
An initial cornerstone - further developments must be awaited
The communication by the Federal Ministry of Finance is extremely gratifying. Previous tax handling and declaration of income in connection with cryptocurrencies was always subject to the proviso that the competent fiscal authority could adopt a different view. The principles set out in the Federal Ministry of Finance communication that have now been issued are binding on local fiscal authorities, thus ensuring more legal certainty throughout Germany.
A glance above and beyond the Federal Ministry of Finance communication reveals, however, that a large number of crypto-related matters, especially those relating to so-called non-fungible tokens (NFTs) and the realm of decentralised finance (DeFi), remain unresolved. In this respect, timely statements by the financial administration would also be desirable. With regard to the extensive documentation obligations of taxpayers, a separate Federal Ministry of Finance communication is expected to be issued in the near future.
Further developments therefore remain eagerly awaited. This also goes, for example, for the question of whether the current regulations governing taxation of cryptocurrencies are constitutional. This legal question has recently been submitted to the Federal Fiscal Court; taxpayers would be well-advised to regard tax assessments as unresolved on this point for the time being.