Bitcoin and co: what to look out for when trading cryptocurrencies
Martin F. is 40 years old and has been working for a well-known insurance company for 20 years now. Martin has a good lifestyle, but has also put a lot of money aside over the years. In the beginning, he made good returns on the money he saved at his bank, but over time the interest income became less and less.
Leaving the reserves in the account was therefore no longer an option for him. As Martin has a personal interest in finance and subscribes to a number of industry magazines, he also noticed the trend towards cryptocurrencies. Bitcoin in particular was on everyone’s lips and seemed very profitable to him. In January 2020, he therefore decided to invest some of his money in various cryptocurrencies.
The price fluctuated daily, but over the course of the year Bitcoin in particular rose constantly. Martin was delighted, because after a long time he was finally making a decent return. He was also happy that he had the courage to invest in Bitcoin. However, he did not want to push his luck, which is why he sold most of the bitcoins at the end of June 2020.
Are cryptocurrencies taxed?
Martin knew from previous share transactions by colleagues that a final withholding tax is due on profits. This is a flat rate of 25% plus solidarity surcharge. He told these colleagues about his earnings from Bitcoin trading, but they then drew his attention to something.
Cryptocurrencies such as Bitcoin are not a recognized means of payment in Germany and cannot be compared with income from shares, investments or other financial transactions from a tax perspective. This means that the gains are taxed at the personal income tax rate plus solidarity surcharge and, if applicable, church tax, as this is a private sale transaction. He therefore has to pay almost half of the income. But it wouldn’t have been necessary if Martin had sought tax advice beforehand.
In principle, gains from the sale of all currencies and assets are included in other income within the meaning of Section 23 EStG. However, one essential condition must be met: No more than one year must have passed between purchase and sale. If this is the case, the gains from the sale must be taxed. If Martin had held the bitcoins for six months longer, the income would have been completely tax-free. However, as he did not know how the share price would develop, selling was the right decision for him.
How is Bitcoin income taxed?
In the case of cryptocurrencies, taxable profits are calculated from the difference between the selling price and the sum of the purchase price and ancillary costs. The latter include the fees charged by the respective exchanges. The result is then the capital gain.
The explanation makes sense to Martin, but when investing in cryptocurrencies, individual coins are purchased. So he wonders how he is supposed to know which coin has been sold? His colleagues explain to him that the first in, first out principle applies. The unit purchased first is also sold first.
He also learns that it has not yet been clarified whether the last in, first out principle could also be applied. This can lead to tax losses being made and the dormant profits in the coins purchased first being realized tax-free at a later date. Just as profits are taxable within a year, so are losses. So if taxable gains from disposals have already been made in 2021, it makes sense to look at which investments are currently in the red and were purchased less than a year ago. If these are then sold at a loss, the tax on the profit is reduced.
Save taxes when trading Bitcoin and co
However, those who simply want to experiment with cryptocurrencies on a small scale are in luck: up to €600 per year in profits are completely tax-free. There is also a glimmer of hope from Bavaria: the tax court is questioning the legality of the taxation.
With the decision of the Nuremberg tax court (decision of 8.4.2020, 3 V 1239/19), the tax court has indicated that there are doubts about the legality of the taxation of Bitcoin and Co. Particularly interesting: the pivotal point of the argument is that the regulation on speculative transactions refers to “economic assets”. And whether a cryptocurrency is an asset has not yet been clarified by the German tax courts.
With the help of a tax advisor, Martin might have been able to benefit from more favorable decisions. Although he had the right instinct when he invested in Bitcoin, he was not aware of the tax aspects.
That’s how most people feel. If you have also invested in cryptocurrencies, you are very welcome to contact us by telephone (02738/6888713) or write to us so that we can resolve the matter in the best possible way. We are also happy to accept receipts digitally for you.
