Cryptocurrencies and the Tax Implications for Individual Investors

Trading in cryptocurrencies (e.g., Bitcoin, Ether) is considered a private sale by individual investors (Section 23 of the Income Tax Act (EStG)):

• The one-year speculation period applies to each individual transaction.
• If the period between the purchase and sale is longer than one year, this transaction is exempt from income tax.

Profits from cryptocurrency trading, provided they fall within the speculation period, are subject to income tax (up to 45%). Losses from cryptocurrency transactions can be offset only during the speculation period and only against gains from private sales; that is, they cannot be offset against other types of income. That is why it is important for individual investors to regularly assess whether and when potential paper losses from crypto transactions should be realized.

In practice, the following key obligations arise in connection with cryptocurrencies:

• You are required to file an income tax return if your taxable income for the year in question exceeds the exemption threshold of EUR 600. If the profit is even just EUR 1 higher than the exemption threshold, the entire profit is subject to tax.
• To prepare the tax documentation, for example, a standardized data model, the calculation using the consumption-based method, and the preparation of the final analysis are required. In practice, this can lead to significant difficulties, especially when cryptocurrency transactions are conducted through different platforms.

In tax literature, there is a growing view that the taxation of cryptocurrency transactions may be unconstitutional, since—given the current state of legal application and enforcement—”the honest person gets the short end of the stick.” For this reason, we recommend keeping tax assessment notices open until the Federal Fiscal Court (BFH) has ruled on the matter.

Please feel free to contact us.

Source: NWB, Investment.com, Tax Laws

Photo: Clifford Photography, Unsplash

Disclaimer: We assume no liability for the accuracy of the information. The information provided here does not constitute recommendations for action.