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Crypto taxation in Germany

Wondering what are the peculiarities of crypto taxation in European countries? SMPLR is ready to clear up everything! Today we’re considering German example of crypto regulations.

In Germany, cryptocurrency is considered private money, not currency, commodity, or stock. For tax purposes, this has several implications:

  1. Private Sales Transactions: If you sell Bitcoin or any other cryptocurrency after holding it for more than one year, any profit from the sale is tax-free. This rule applies to "private sales transactions," which is the category under which Bitcoin falls.
  2. Speculative Transactions: If you sell cryptocurrency within one year of purchasing it, any profit could be subject to income tax as a speculative transaction. The exact tax rate depends on your overall income, but it can be up to 45%. However, there is a tax exemption limit of 600 Euros per year. If your profit from selling cryptocurrencies (or any other speculative transactions) is less than this amount, you do not have to pay any tax on it.
  3. Mining Cryptocurrencies: If you mine cryptocurrencies, this is considered a form of self-employment, and you would need to file taxes accordingly. This can involve income tax and potentially value-added tax (VAT), depending on the specifics of your situation.
  4. Payment with Cryptocurrencies: If you use Bitcoin or another cryptocurrency to purchase goods or services, this is considered a taxable event. The amount of tax owed would be based on the value of the cryptocurrency at the time of the transaction.

Cryptocurrency accounting in Germany, as of my knowledge cutoff in September 2021, is subject to a few key considerations:

  • Classification: Cryptocurrencies are classified as intangible assets. They are not recognized as legal tender, financial assets, or stocks.
  • Valuation: Cryptocurrencies are usually valued at the acquisition cost. However, if there is a permanent decrease in value, lower value adjustments may be necessary.
  • Mining: Cryptocurrency mining is considered a commercial activity. The mined coins are to be recorded as self-created intangible assets. The production costs are considered the initial value of the mined coins.
  • Trading: If a company trades cryptocurrencies, it is considered a commercial activity. The cryptocurrencies should be recorded as current assets and valued at the lower of cost or market principle.
  • Payment: If cryptocurrencies are used for payment, the transaction should be recorded at the fair value of the cryptocurrency at the time of the transaction.
  • VAT: As per a European Court of Justice ruling, transactions to exchange a traditional currency for Bitcoin (or vice versa) are exempt from VAT. This also applies to other cryptocurrencies.
  • Income Tax: Companies that hold cryptocurrencies are subject to income tax on any gains they make from the sale of the cryptocurrencies.
  • Corporate Tax: Corporations are subject to corporate tax on their worldwide income, including from cryptocurrencies.
  • Trade Tax: Commercial activities, including those involving cryptocurrencies, are subject to trade tax.

Here are some key points about cryptocurrency legislation in Germany:

  1. Legal Status: Cryptocurrencies like Bitcoin are recognized as private money or digital representations of value in Germany. They are not considered legal tender, but they are legal to use for transactions.
  2. Regulation: The Federal Financial Supervisory Authority (BaFin) is the main regulatory body overseeing cryptocurrencies in Germany. BaFin treats cryptocurrencies as financial instruments and requires businesses dealing with cryptocurrencies to be licensed.
  3. Cryptocurrency Businesses: Cryptocurrency exchanges, wallet providers, and other related businesses must be licensed by BaFin. They are also required to follow Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
  4. Security Token Offerings (STOs): Germany has legislation that allows for STOs, which are a type of securities offering where the securities are represented by a digital token on a blockchain. The German Securities Prospectus Act requires a prospectus for public STOs, although there are some exceptions.
  5. Blockchain Strategy: The German Federal Government adopted a blockchain strategy in 2019. The strategy outlines measures to exploit the opportunities of blockchain technology, to mobilise its potential for digital transformation, and to prevent misuse. It also includes measures to improve the regulatory framework.
  6. Taxation: Cryptocurrencies are subject to taxation in Germany. If a cryptocurrency is held for more than a year, any gains from the sale of the cryptocurrency are tax-free. If sold within a year, they may be subject to income tax. Cryptocurrency mining and trading can also have tax implications.
  7. Banking and Cryptocurrency: In 2020, a law came into effect in Germany that allows banks to sell and store cryptocurrencies, making Germany one of the first countries to introduce such legislation.

Let's delve into specific scenarios and understand the taxation implications for each in Germany:

1. Buying Goods with Cryptocurrencies:

- If you use cryptocurrencies to purchase goods, it's considered a capital gain. For instance, if you bought Bitcoin for 2,000€ and its value rises to 5,000€, and you then use it to buy a computer, you'd need to pay tax on the profit (3,000€) as if it were income.

2. Giving Away and Donating Cryptocurrencies:

- You can give away up to 20,000€ per year tax-free (e.g., to friends) without considering the one-year limit. For spouses, the limit is 500,000€. Donations in crypto are also tax-free. However, the one-year holding limit is transferred to the recipient in the case of a gift.

3. Hard Forks and Soft Forks:

- Hard forks, like Bitcoin Cash and Bitcoin Gold, create new assets. For tax purposes, the original asset remains unchanged. For the new asset, the acquisition date of the original is used, and the acquisition cost is divided based on market values. In many cases, the acquisition cost of the new asset is 0€ if no market values are identifiable at the time of the fork.

- Soft forks are more like software upgrades and don't have direct tax implications like hard forks.

4. DeFi (Decentralized Finance):

- DeFi refers to financial innovations in blockchain and crypto tech. It allows services like borrowing, lending, and insurance to be handled using smart contracts. Rewards from DeFi activities are defined as acquisition transactions, and their taxation depends on the market price at the time of acquisition.

5. Staking:

- Income from staking is subject to taxation as part of private asset management. Rewards from staking must be reported as other benefits in the tax return. If the total income from such activities is below 256€ per year, it's tax-free.

6. Lending:

- Rewards from lending are defined as acquisition transactions. If there's a subsequent sale of the rewards, it's taxable if sold within the one-year holding period. The exemption limit for such income is 256€ per year.

7. Mining:

- Rewards from mining are also defined as acquisition transactions. The acquisition costs are determined based on the market price at the time of acquisition. If rewards are sold within a year, they're taxable. The exemption limit for such income is 256€ per year.

8. Exchange Fees:

- Transaction fees, like gas fees, can be claimed as expenses and offset against profits. They are considered incidental acquisition costs and are deducted from the profit.

SMPLR warns you: it’s essential to consult a tax professional use specialized software in order to ensure accurate and compliant tax reporting.

Be accurate about you finances, SMPLR’s always ready to help you with that!