Cryptocurrencies such as Bitcoin, Ethereum, and Monero are considered intangible assets and may result in taxable transactions (Federal Fiscal Court)
For income tax purposes, private trading in cryptocurrencies does not fall under the broad tax regime governing so-called capital assets of private investors (Section 20 of the German Income Tax Act (EStG)). However, like private real estate or foreign currencies (foreign exchange), cryptocurrencies may also be subject to income tax as “other economic assets” when bought and sold within certain time frames. For private real estate, the so-called speculation period is 10 years, and for foreign exchange, it is one year, provided that neither involves commercial trading. For foreign exchange, the so-called FIFO (First In, First Out) method applies to determine taxable transactions and the resulting gains or losses. These taxation principles in the area of foreign exchange apply mutatis mutandis to private sales of cryptocurrencies.
A taxpayer who realized millions in profits from private crypto transactions in 2017 challenged the tax liability in court, regardless of the applicable capital gains period, and questioned the tax classification of virtual currencies—using Bitcoin, Ether, and Monero (currency tokens and payment tokens, respectively) as examples—as intangible (“other”) economic assets within the meaning of the Income Tax Act (Section 23(1), sentence 1, no. 2 EStG). Like the lower-instance tax court’s ruling, the Federal Fiscal Court also held in its decision of February 14, 2023 (Case No. IX R 3/22, published on February 28, 2023), that virtual currencies such as Bitcoin and others constitute “other” economic assets, since they are to be regarded economically as assets similar to means of payment, are subject to independent valuation among third parties, and the concept of an economic asset is not limited to tangible property or rights. Rather, a broad interpretation of the term should be applied.
Therefore, private transactions involving virtual currencies that are acquired and resold within one year (calculated using the FIFO method) are subject to income tax and must be reported and taxed by the taxpayer using the standard income tax rate (up to 45% plus the solidarity surcharge of 5.5% and, if applicable, church taxes). In this ruling, the Federal Fiscal Court conclusively reaffirmed that it currently sees no structural deficit in taxation or tax collection with regard to the accurate and complete taxation of private crypto transactions by taxpayers in Germany. Therefore, there are likewise no constitutional concerns regarding the private income tax liability of crypto transactions under Section 23 of the German Income Tax Act (EStG).
From a tax practice perspective, the accurate and, above all, complete taxation of crypto gains often results in an extremely high administrative burden for taxpayers, tax advisors, and tax authorities; it is therefore advisable to have taxable transactions and their gains or losses determined using professional software solutions in collaboration with specialized tax advisors.
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