Whether as a substitute currency or as an object of speculation – cryptocurrencies such as Bitcoin and Co. have now established themselves in the global financial world. The market capitalization of all cryptocurrencies is between $800 billion and $900 billion, depending on daily exchange rates.
Are you also one of the investors who have joined the “Techno Tour de Force” (quote from Bill Gates) and invested in cryptocurrencies? If so, choosing the right coins is important. But why should you care about cryptocurrency and tax? Knowing the legal framework will help you avoid legal pitfalls and keep your tax burden as low as possible.
Cryptocurrencies and taxes: The overview
In the following table you can see an overview for which type of crypto profits you have to pay taxes, how and when:
|Activity||Holding period||Taxable||Exemption limit||Reasons||Register business|
|Mining||no matter||yes (commercial)||x||x||yes|
|Sale Coins||<1 year||yes||up to 600 €/year||Other assets||no|
|Sale Coins||>1 year||no||x||x||no|
|Staking passive||<10 years||yes||256 €/year||Other performance||no|
|Staking passive||>10 years||no||x||x||no|
|Staking masternode||no matter||yes (commercial)||x||x||yes|
|Lending||<1 year||yes (commercial)||256 €/year||Other performance||yes|
How do tax-relevant profits arise with cryptocurrencies?
In order for the tax office to make you pay, you must first make profits on cryptocurrencies. Depending on the type of investment, different options exist here:
1. price gain from the sale of cryptocurrencies
The standard case looks something like this:
- You buy a cryptocurrency at a specific rate
- The share price increases over time
- You resell the coins and make a profit in the process
The profit flows to us as income, which raises the question of taxation.
2. return on investment through derivatives trading on cryptocurrencies
Today, very many CFD brokers offer the opportunity to open positions on the price trend of well-known cryptocurrencies.
- You open a long position (on rising prices) or a short position (on falling prices).
- Ideally, the cryptocurrency price will take the desired direction.
- You close the position and make a profit.
Here, too, a profit is generated that can be considered as income. Thus, the question of taxation arises here as well.
3. current income through processes such as staking
Today, cryptocurrencies such as Ethereum offer the option of lending their own coins to verify transactions without a central intermediary. For this you will receive a reward in the form of more coins. Put simply, you generate income through the inflow of additional currency units.
When and how do you have to pay tax on cryptocurrencies?
How much and when the tax on cryptocurrencies applies depends on the situation. Normally, you purchased coins through a crypto exchange and later sold them again at a profit. This is considered a private sale transaction. Cryptocurrencies are therefore treated the same as other miscellaneous assets here.
Gains from private sales transactions belong to the other income according to §22 EStG.
The following rules apply to them:
1. taxation with personal income tax rate
The tax on profits from the sale of cryptocurrencies is based on your personal income tax rate. This means that the profits are added to your earned income and the tax rate is calculated from this.
2. tax exemption limit of 600 euros per year.
Income from private sales transactions remains tax-free up to an amount of 600 euros per year. However, this is not an allowance, but an exemption limit. This means: If you achieve profits of 601 euros, you must pay tax on the entire amount.
Attention: The tax exemption limit applies to all private sales transactions per year. So, if you sell any other assets like a rare piece of furniture, you will have to add this amount to your profits from crypto sales.
3. speculation period of one year – an example
You can avoid tax on cryptocurrencies as an investor if you comply with the 365-day speculation period. A sale after this period no longer triggers taxation.
Here is an example to illustrate:
You bought two Bitcoins on 04 May 2022 at a price of 37,700 euros each. Let’s assume that the share price has risen to 40,000 euros by May 3, 2023.
If you sell on May 3, you will have to pay tax on the profit of 4,600 euros together with your income at your personal income tax rate. If you wait one more day and sell on May 4, the speculation period expires and you can realize the profit tax-free.
Caution: A tax gain also occurs when you exchange one cryptocurrency for another. So the taxation does not take place only at the time of exchange into fiat currencies like Euro or US Dollar!
How is the tax on cryptocurrencies calculated?
After selling your Coins, you can calculate your taxable capital gain:
Profit = Sales price – Purchase price
You add this profit to your income in the corresponding year. The total amount then forms the basis for taxation according to your personal income tax rate. Depending on the amount of your income, this ranges from 0 to 45 percent per year.
Avoiding tax on cryptocurrencies: What you should consider with the speculation period
At first glance, the regulation of the speculation period seems simple: If you hold the coins for more than one year, the profits from a sale are tax-free.
In practice, unfortunately, such a clear situation rarely arises. The main reason: as soon as you make purchases and sales more than once a year, the calculation of the speculation period is no longer so simple.
- You buy 2 coins of a cryptocurrency for the first time on January 06, 2020 at the rate of 4,000 euros.
- On March 12, 2021 of the next year, buy 2 more coins at the rate of 4,200 euros.
- On February 10, 2022, resell 3 of these coins at the rate of 5,500 euros.
Now the question arises: Have you complied with the speculation period or not?
In this context, there are two different possible methods for simplification:
1. FIFO method (first-in-first-out)
This method assumes that the coins bought first will be sold first. In this case, the basis for the tax on your cryptocurrencies could be calculated like this:
|Purchase or sale||Date||Value||Explanation|
|Purchase 2 Coins||06.01.2020||2 x 4.000 = 8.000 Euro||Sold on 10.02.2022 – compliance with speculation period|
|Purchase 2 Coins||12.03.2021||2 x 4.200 = 8.400 Euro||1 Sold on 10.02.2022 – speculation period not observed|
|Sale of 3 coins||10.02.2022||3 x 5.500 = 16.500 Euro||Taxable profit: 5,500 Euro – 4,200 Euro = 1,300 Euro|
2. LIFO method (last-in-first-out – no longer relevant for tax purposes).
This approach is the counterpart of the FIFO method. Here, the coins that you bought last are sold first. In the example above, these would be the two coins of 12.03.2021. This would result in the taxable profit being twice as high.
In the meantime, however, this approach no longer plays a role in the taxation of cryptocurrencies, as can be seen from this draft BMF letter.
Attention: The speculation period of one year does not apply to cold staking, use for the purpose of proof of stake or lending. If you generate income from your tokens on this basis, the speculation period is extended to 10 years.
Can losses from cryptocurrencies be offset for tax purposes?
For tax purposes, you may offset losses from crypto trading against gains from other private sales transactions. If no profits have been generated, it is also possible to carry them forward to the next year or to carry them back to the previous year.
Theft of tokens does not count as a tax loss for this purpose. This is one of the reasons why it is important to store tokens held for the long term on a hardware wallet.
Tip: Any fees incurred when buying or selling coins can be claimed against tax and reduce the profit.
CFDs and certificates on cryptocurrencies: How much is the tax?
Have you invested in CFDs based on cryptocurrencies or bought corresponding certificates? In this case, it is not private capital gains because you are not actually buying the Coins.
A (leveraged) placed order here only targets the performance without actually provoking a buy. These financial instruments are considered a financial investment and are therefore subject to capital gains tax.
Here, the uniform tax rate of 25 percent plus solidarity surcharge and possibly church tax also applies to cryptocurrencies. In many cases, the tax is withheld directly by the broker and paid to the tax authorities.
Taxes for gains from passive staking
If you use your coins for passive staking and receive remuneration for this, this falls under other income according to §22 para. 3 EStG. They must pay tax on this income at their personal income tax rate. However, only an annual exemption limit of 256 euros per calendar year applies here.
Notice: Should you sell the tokens obtained through Staking, the same tax rules apply as for the sale of cryptocurrencies. So you can also benefit from the speculation period here. The date of purchase is the date of inflow.
How are NFTs taxed?
Non-Fungible Tokens (NFT) offer you the opportunity to claim unique digital assets. These are taxed in the same way as normal cryptocurrencies. A sale is considered a private disposal transaction and is therefore subject to taxation at your individual income tax rate. After a holding period of one year, you can realize corresponding gains tax-free.
When does trading in cryptocurrencies count as a commercial activity?
In principle, trading cryptocurrencies is initially considered private asset management. Unfortunately, however, it happens again and again that the tax authorities classify crypto trading as commercial. Especially with regard to the speculation period, this is very annoying: in commercial trading with cryptocurrencies, there is no possibility to realize your profits tax-free.
But how can this be prevented?
The following criteria will help you better assess your own crypto activities:
The status of self-employment distinguishes you from non-self-employed activities. Do you bear entrepreneurial risk? Do you work on your own account? IT freelancers will answer “yes” to these questions with regard to their business. Here, there is a somewhat higher risk that the tax office will assume self-employment also with regard to crypto investments. However, this need not be the case.
2. sustainable activity
Sustained activity is when you trade cryptocurrencies very frequently. Repeat intent is an indication of a present trade. A comparison: If you sell something used from your household on eBay, this is not considered commercial. However, if you repeat this frequently, the tax office will assume that you have a trade.
Important: The sustainable activity does not refer to your other activities as an IT-freelancer. It is solely about the frequency of trading cryptocurrencies.
3. intention to make profit
Another requirement for commercial crypto trading is the intention to make a profit. The main issue here is the distinction from hobby business.
4. participation in general economic traffic
This criterion is met whenever you interact with clients in any way. Renting” your own coins for the purpose of stacking can lead to problems here.
5. there is no private asset management
Even if this criterion is not directly mentioned in §15 EStG, it counts as an unwritten additional condition. The demarcation is not always easy: private asset management focuses on “reaping the rewards” from one’s own assets. Commercial actions tend to be aimed at generating the highest possible profits quickly through frequent transactions such as selling and reinvesting.
In terms of crypto trading, this means that passive staking is the ideal picture of asset management: you rent out your coins and earn a return as a result. In the case of high-frequency trading in cryptocurrencies, the tax authorities may sometimes assume a commercial intent.
As a general rule, a commercial enterprise is only deemed to exist when all criteria are met. In such a case, this would have some tax consequences for you:
If you register a trade, you pay tax on the income at your personal income tax rate. There is no exemption limit and the speculation period with tax exemption after one year of holding no longer applies.
In addition, trade tax is also due if your profit exceeds the tax-free amount of 24,500 euros per year.
You must additionally worry about sales tax. For example, mining consideration is not subject to sales tax. In addition, the exchange of fiat currencies for cryptocurrencies and vice versa is exempt from VAT. You may be able to deduct input tax on a fee invoice for a wallet. However, this only applies if the place of performance is in Germany. Depending on the individual case, it may also be worth considering a small business to avoid the sales tax issue. In this case, however, you must waive the input tax deduction.
Caution: Especially in recent years, tax offices have more frequently tried to declare profits from cryptocurrencies as commercial in order to collect taxes after all. If in doubt, you should contact your tax advisor to clarify the facts and possibly file an appeal.
Staking via masternodes and mining: The tax office often sees this as a commercial activity
Are you actively staking via masternodes or even mining? In these cases, the tax authorities often assume a commercial intent. As a result, you will have to register a business and the cash flows be counted as business income.
Even though the tax authorities almost always assume that mining is a commercial activity, the status of private asset management is not excluded. For this, however, you must prove that the relevant characteristics are not present.
Taxes on cryptocurrencies: Know regulations and minimize tax burden!
Blockchain technology not only opens up unimagined possibilities for future applications. Digital currencies have also become established as a form of investment. With regard to taxation, there are now quite specific regulations. The speculation period in particular gives you the opportunity to avoid tax on cryptocurrencies. Use regulations to your advantage and minimize your tax burden!
You have to pay tax on profits from trading cryptocurrencies at your personal income tax rate. An exemption limit of 600 euros per year applies. From 601 euros the complete profit is taxed. If you hold coins for more than one year, the profit remains tax-free.
Yes – the speculation period makes it possible. If you hold your cryptocurrencies for more than one year, you do not have to pay taxes on the gains from cryptocurrencies. For Lending and Cold Staking and Proof of Stake, the holding period is extended to 10 years. However, the above deadlines do not apply to profits from derivatives (e.g. CFD) or commercial profits based on cryptocurrencies. There is always a tax liability here.