What are cryptocurrencies?
Cryptocurrencies are digital assets that can also be used for payments are exchanges. As they are issued by global communities and not by the state, they are not considered traditional or legal currency. In September 2021, El Salvador was the first country worldwide to adopt Bitcoins as a legal tender – nowadays, about 70% of their population pay with bitcoins instead of using traditional banking services, it is possible that other countries may follow suit.
Cryptocurrency’s prices and market depends heavily on supply and demand and is subject to strong fluctuations. Prices have been rising steadily over the past few years, and due to this, some early investors are already millionaires.
Bitcoin was one of the first cryptocurrencies, introduced in January 2009, but nowadays there are about 5,000 different cryptocurrencies – 1,000 of these are relevant and achieve a daily trading turnover of about 10,000 USD. Some of the most famous cryptocurrencies, apart from Bitcoin, include: Ethereum, Ripple, Dogecoin, Liteecoin, Cardano, Polkadot, and Theta. Facebook is also trying to establish itself on the market with its own cryptocurrency called Diem.
Due to the rising prices of Bitcoin and expected profit, Bitcoin and other digital currencies are extremely attractive for investors. Cryptocurrencies have also established themselves as a secure means of payment and trading transactions can be completed online without banks needing to intervene.
Trading cryptocurrencies: Tax-related differences to capital investments
Profits from cryptocurrencies are not considered capital assets, instead, they are considered private sales transactions and can not be compared to other financial investments such as shares or funds. Capital income is monitored closely by financial institutions, gains/losses are automatically offset, and final withholding tax (Abgeltungssteuer) is automatically paid to the appropriate tax office. Crypto assets, on the other hand, are independent of banks and typically traded anonymously.
Do I have to pay tax on my cryptocurrency sales profits?
The holding period of your cryptocurrencies decides whether or not they are taxed. If you you’re your cryptocurrency for more than one year and then sell it, your profits remain tax-free and must not be declared on your tax return.
If you sell your crypto assets within a year of buying them and earn over 600 euros in profits, tax will be due on the profits. Gains/losses from your cryptocurrency sales are then classified as private sales transactions for tax purposes and must be reported on your tax return. The gains are taxed according to your personal tax rate (Steuersatz) and include solidarity surcharges and church tax, if applicable. Crypto assets are considered economic goods in income tax law and there is no separate form of taxation.
Losses incurred through crypto sales can be offset against other private sales transactions. These can be claimed as a loss carry forward (Verlustvortrag) or loss carry back (Verlustrücktrag) at your local tax office and offset against profits from the previous year or upcoming profits.
You can deduct the transaction fees you incurred when buying and selling your cryptocurrency as income-related expenses (Werbungskosten) for tax purposes. This also applies to electricity costs (operating expenses/Betriebsausgaben) incurred when mining commercially.
How is the tax on your cryptocurrency calculated?
There are a few different methods of taxation for crypto assets:
- FIFO Method (“First in, first out”): This method assumes that the first crypto assets that you obtained will be the first that you sell. This is the recommended method when crypto prices are on the rise.
- LAFO Method (“Last in, last out”): This method assumes the crypto assets that you bought last are the first to be sold.
- Average prices can also be used as a basis for calculating your profits and losses.
Currently, no specific calculation method is mandated by law and you are free to choose your own; however, the Hamburg tax authorities treat cryptocurrencies as state foreign currencies, for which the FIFO method is required by law.
Note: Ensure that you write down which method you have chosen in case the tax office asks. Be sure to document your transactions and acquisition costs in detail to determine your profit and taxable amounts.
The following calculation formula can be used:
- minus acquisition cost
- minus income-related expenses (such as distribution provisions)
= taxable amount
Losses reduce the amount of tax you have to pay. This means that losses from other private sales transactions in the same calendar year can be included in the profit calculation and lead to a reduced tax rate.
Is there a tax exemption limit (Steuerfreigrenze)?
There is an emption limit of 600 euros for profits made from private sales transactions. This isn’t only for cryptocurrency sales – this also includes art sales, antiques, real estate, etc. The profits from your cryptocurrency sales are offset against your other private sales transactions. If your total profits are below 600 euros, they remain tax-free. If profits of 600 are exceeded, the complete amount is taxed – not only the excess amount.
Exception: The is no tax exemption after 12 months for commercial trading and commercial “mining” with cryptocurrencies.
Taxation for companies
Cryptocurrency profits generated through your company are treated as “income from business operations” according to §15 EStG (German Income Tax Law). There is no minimum holding period and in addition to trade tax, these profits are subject to income tax (sole proprietors, partnerships) or corporate income tax (GmbHs, AGs, etc.) depending on the legal form of the company.
What is Bitcoin mining?
The term “mining” originates from the gold mining era and describes the so-called “prospecting” for crypto assets. During this process, the user’s computer solves complex mathematical equations that create crypto-money.
Mining in private is tax-free, however, one can easily slip into a commercial area on which taxes are due. Mining becomes commercial if you participate in it independently, sustainably, and with the intention of making a profit in the general economy and if you exceed the exemption limit of 265 euros within a calendar year. Your personal tax rate determines the amount due on your profits, and tax authorities may demand an additional trade tax.
Do I have to pay tax on interest (Zinsen)?
The resulting profits of crypto assets held for over 12 months are tax-free, but not the interest. You receive interest through ”lending,” which describes the process of crypto assets made available by lenders on crypto exchange or lending platforms at a fixed interest rate. If you lend your cryptos as a private individual, you receive interest. If any profits are received from the interest on your cryptocurrencies they are subject to final withholding tax (Abgeltungssteuer). In the future, tax exemption within the speculation period may increase from one year to ten years, according to the draft from the BMF dated 17.06.2021. The speculation period describes the time period between acquisition and sale of your cryptocurrencies.
Where do I enter income from cryptocurrency in my tax return?
Profits resulting from cryptocurrency sales are grouped under “other income.” Private investors can enter these on the Other income form (SO).
Tip: The tax tool provided by wundertax provides you with a simple tax interview that gathers your important data and automatically enters your income and deductions on the appropriate forms of your tax return. Under “income,” you can enter how long the currency was in your possession, what price you bought it for, when you bought it, and when you sold it. You can’t do anything wrong – there are explicit fields in our tax interview that ask these questions.