Income tax on Bitcoin?

When individuals acquire crypto assets such as BitCoins and resell them within a year, the question arises whether the profits made are subject to income tax.

The Cologne Finance Court had to decide this question in its judgment of 25 November 2021 (14 K 1178/20). For the first time, a detailed reasoned decision has been issued on the issue of crypto taxation. The financial judges in Cologne ruled that cryptographic securities are economic goods according to Section 23 (1) No. 2 sentence 1 EstG.

“Contrary to the plaintiffs’ view, the fact that crypto values ​​are only virtual and do not exist in the ‘real world’ does not conflict with the fact that crypto values ​​are economic goods. on the one hand, this consideration does not do justice to the actual circumstances and, on the other hand, it does not do justice to the scope of the notion of property in tax law. The plaintiffs do not recognize that the notions of virtual and real do not are not opposed in this respect. Even purely virtual processes are those of the “real world”. Virtual processes are generated electronically on data carriers as media, modified and stored if necessary. As electronically stored processes, they can be read, transmitted and, if necessary, reproduced.They differ from other processes recorded in number or in text on other media, such as books or magnetic sound carriers, only by their t technique of production and storage, but not by their character. All of these processes are “real world” processes, regardless of the nature of the medium. Since the concept of economic good itself – which cannot be read as such according to the current state of science – can capture thoughts if they are only manifested and marketed as inventions or recipes, this must apply even more to electronically stored and readable processes, even if it is only “Signature Chains”. Thus, the character of non-materialized titles as economic goods is not called into question, even if today the generation, recording and transmission are essentially carried out virtually.

(b) Cryptographic values ​​convey concrete possibilities and advantages in legal transactions. This assessment is based on the fact that crypto-assets can and will receive a certain value due to demand on online trading platforms (cf. e.g. Bünning/Park, BB 2018, 1835, 1836). Anyone who acquires crypto assets receives clearly defined trading opportunities for the consideration provided, even if their feasibility is uncertain, because the risk of a decline in value is just as inherent in crypto assets as the possibility of a significant increase in value. by rising prices. There are concrete and real possibilities to resell the crypto values ​​for a profit, so that in the event of a dispute – as shown by the amount of profit made by the plaintiff – the expectations attached to it have in fact not been disappointed. . If payments are made to obtain a chance of winning, the prospect of winning appears as an economic good (cf. BFH judgment of 29 November 2012 IV R 47/09, BStBl II 2013, 461 Cm 37). The fact that the payments made by the plaintiff for the crypto assets he acquired were the consideration for chances of gain and not series of transactions and figures worthless in themselves is also proven by the fact that the payments of the applicant are based on the exchange rates at the time of the measured trading platforms.

The plaintiffs’ objection that this means that undemanding crypto-assets with no intrinsic value, which unlike the lottery have no rights, are treated as a benefit and an economic good, does not hold water. Contrary to what plaintiffs claim, crypto transactions cannot be treated as “pure” gambling like a lottery. There are fundamental differences between these and gambling, even though transactions in crypto assets are highly speculative. Games of chance only offer a random chance of winning according to the respective rules of the game, which is usually lost with the loss of the stake if the game is played without a win. In contrast, established markets have emerged for crypto assets, which provide economic benefits through corresponding trading activities. Crypto-assets are considered value by the market and therefore can be considered as commodities. They do not expire through the passage of time or through use as objects of speculation. The plaintiffs’ opposing view ignores economic realities.

Incidentally, crypto-assets would be compared to foreign currencies. Some of them are already used as means of payment, otherwise they can be exchanged for legal tender on exchanges:

“Finally, the structural comparability with foreign currencies (cf. Reiter/Noltem BB 2018 1179, 1180) also supports the fact that crypto-assets are economic goods within the meaning of Article 23 (1) sentence 1 no. 2 sentence 1 EStG may also be the subject of a private sale operation (cf. § 23 al. 1 sentence 1 no. 2 sentence 3 EStG; see also BFH rulings of 2 May 2000 IX R 74/96, BStBl II 2000, 469; IX R 73/98, Federal Tax Gazette II 2000, 614; of 30 November 2010 VIII R 58/07, Federal Tax Gazette II 2011, 337; of 22 January 2014 IX R 11/13, Federal Tax Gazette II 2014, 385). It is true that cryptographic assets are not currencies in the strict sense, since they are neither issued nor guaranteed by a central bank or a public authority. Nevertheless, cryptographic assets are comparable to foreign exchange because the people are willing to exchange money, services or material assets for units of account that can technically be a assigned to their user account (cf. Gillen/Schubert, jurisPR-BKR 9/2021 Note 4) . Bitcoins have even become a widely used complementary currency (cf. Djazayeri, jurisPR-BKR 1/2019 note 2). Even if these are not issued by a central office and can only be paid in Bitcoins within the network, they can at least be exchanged for legal tender on many exchanges (cf. Djazayeri, jurisPR-BKR 1/ 2019 Note 2). This exchange option is also available for foreign currencies. The fact that Bitcoins are subject to large unpredictable fluctuations does not change the fact that Bitcoins can be compared to foreign currencies, as foreign currencies can also be subject to large fluctuations in value. The currencies of Argentina and, more recently, of Venezuela and Turkey are examples. In a brief information dated April 20, 2018 (Der Betriebs 2018, 1185), the Oberfinanzdirektion Nordrhein-Westfalen referred to the fact that BaFin considers bitcoins and other cryptocurrencies as regulatory units of account – comparable to currencies currency – within the meaning of Section 1 (11) sentence 1 no. 7 KWG would qualify and the same principles would therefore also apply to foreign currency transactions. In terms of sales tax, the Court of Justice of the European Communities (CJEU) has treated bitcoins in their function as a means of payment in the same way as conventional currencies for the purposes of tax exemption (cf. CJEC judgment of 22 October 2015 C-264/14 Hedqvist, BStBl II 2018, 211). A certain recognition of crypto values ​​as money also corresponds to the opinion of the European legislator. This appears clearly in recital 8 of the amending directive, where fiduciary money and virtual currencies are mentioned at once as means of payment and exchange (Directive (EU) 2018/843 of the European Parliament and of the Council of May 30, 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing and amending Directives 2009/138/EC and 2013/36/EU ( “modifying directive”).

If you want to look at it differently, it is currently not possible to tax profits from trading crypto assets.

During the preliminary proceedings, the Nuremberg Finance Court had serious doubts as to whether crypto assets could qualify as economic goods, and the taxpayer was right. It was not entirely clear to the court “on what” it was deciding (FG Nuremberg, decision of 8 April 2020 – 3 V 1239/19.

There is currently no Supreme Court decision. The plaintiff appealed the Cologne judgment to the Federal Finance Court. The procedure is listed there under file number IX R 3/22. The audience is currently not predictable.

Due to this unclear legal situation, the following procedure is recommended in the near future:

  1. Gains from the sale must be reported on the tax return. Otherwise, there is a risk of tax evasion.
  2. An opposition must be filed against the tax notice if and insofar as the tax authorities have actually taxed the profits. Only then can you protect your rights in the event that the Federal Tax Court should annul the crypto-taxation. Otherwise, validity applies.

If the cryptographic values ​​are part of the assets of the company (for example a company), the qualification of economic good is not relevant. In this case, the profits from the sale are commercial operating income. In the case of commercial operations, any increase in wealth is a taxable profit. They are subject to corporation tax in the year of their creation.

I am at your disposal for these and other questions about cryptocurrencies.

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