Bundesfinanzhof has made its first decision regarding cryptocurrencies. In this context, crypto investors are required to report their crypto profits on their income tax returns.
German court rules on cryptocurrency earnings
As we reported on Kriptokoin.com, Germany’s Federal Financial Court (BFH) has ruled in a groundbreaking decision that cryptocurrency profits are subject to taxation just like traditional assets. Crypto investors are required to report these profits on their income tax returns, following the rules of income from private sales transactions. BFH has decided that unlike stocks, where earnings are tax-free if held for longer, cryptocurrencies are an asset type that is subject to income tax for private sale transactions within one year of acquisition and sale.
The highest German financial court made this decision nearly 15 years after Bitcoin was launched, following a lawsuit by a private crypto investor from Cologne who bought, traded and sold various cryptocurrencies. The investor has entered into partial buyout contracts with crypto asset providers based on current prices on digital trading platforms. He also made clearing agreements with cryptocurrencies in his portfolio. The investor reported a crypto earnings of around 3.4 million Euros in his 2017 tax return.
According to the income tax law, cryptocurrencies are in the “other assets” class.
The tax dispute arose between the investor and the tax office, who claimed that the profit was subject to income tax. The investor argued that a crypto earning is a dataset and therefore cannot qualify as an income taxable ‘asset’. He also argued that structural implementation deficiencies stand in the way of taxation. If a taxpayer publicly declared that he had invested in crypto assets, the government could practically only tax profits from crypto transactions.
As a result, only the honest taxpayer would pay taxes on successful crypto transactions that he deems unconstitutional. The Cologne tax court did not accept the investor’s claims and dismissed the case in 2021. Similar lawsuits in other German federal states were also dismissed, apart from a case in Nuremberg that expressed doubts about the taxability of speculative gains from cryptocurrencies.
BFH has now decided that cryptocurrency profits are “other assets” within the meaning of income tax law. The court said that the term ‘property’ should be interpreted broadly. It featured “tangible opportunities and advantages that are costly for a taxpayer to obtain and are subject to separate independent assessment from the general public.”
Taxation of cryptocurrency earnings
Such is the case with cryptocurrencies. Bitcoin, Ethereum and Monero are economically accepted payment methods that are traded on platforms and exchanges. They have market value and can be used in payment transactions between parties. Thus, BFH supports the legal position of the Federal Government, which the Federal Ministry of Finance outlined in a May 2022 guide to the handling of tax on profits from Bitcoin and other cryptocurrencies.
Regarding the investor’s claim that only honest taxpayers pay taxes on crypto earnings, BFH replied that there is no lack of structural implementation. There are no collection rules to prevent taxation, and there are no indications that the tax office cannot record gains and losses from crypto transactions. BFH has classified cases where investigative measures, such as collective requests for information, have failed, as “individual cases” that do not constitute a structural lack of enforcement.
It is unclear how much revenue the German government derives from taxing crypto transactions. However, the new BFH resolution establishes clear guidelines for the taxation of cryptocurrency earnings and clarifies that investors must report such earnings on their tax returns.
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