Private Clients07.03.2023 Newsletter
The German Federal Fiscal Court [Bundesfinanzhof, BFH] has published the first ruling on the taxation of virtual currencies. With its decision of 14 February 2023, it clarifies that capital gains realised by a taxpayer within one year from the sale or exchange of cryptocurrencies such as Bitcoin, Ethereum and Monero are subject to income tax as a private sales transaction.
In the facts underlying the decision, the plaintiff had acquired, exchanged, and resold various cryptocurrencies, generating profits totalling €3.4 million in 2017. The tax office assessed income tax on these profits in the amount of 1.4 million euros, whereupon the investor filed an action with the fiscal court. The lawsuit has now failed before the BFH. The BFH affirmed the tax liability of the capital gains and thus confirmed the previous decision of the Cologne Fiscal Court (ruling dated 25 November 2021 - 14 K 1178/20).
According to the BFH, virtual currencies represent intangible assets and thus "other assets" within the meaning of Sec. 23 (1) sentence 1 no. 2 sentence 1 German Income Tax Act [Einkommensteuergesetz, EStG], with the result that the gain is taxable if sold within one year of the acquisition. Moreover, the taxation of gains from the sale of cryptocurrencies is also not constitutionally objectionable. In particular, there is no "structural enforcement deficit" as alleged by the plaintiff, as there is nothing to indicate that profits and losses from transactions with cryptocurrencies cannot be determined and recorded by the fiscal administration. The fact that individual taxpayers nevertheless conceal the profits from cryptocurrency trading from the tax authorities does not justify a structural enforcement deficit.
The BFH's decision ultimately does not establish any new guidelines for the income tax treatment of private sales of cryptocurrencies, but it does for the first time provide supreme court support for the view already held by the fiscal courts (see, for example, fiscal court of Baden-Württemberg, ruling dated 11 June 2021 - 5 K 1996/19) and by the fiscal administration (BMF circular dated 10 May 2022, IV C 1 - S 2256/19/10003 :001) on this topic.
Private individuals who sell virtual currencies at a profit within a speculation period of one year must pay tax on this profit. Profits generated after this one-year period, on the other hand, are tax-free. Private crypto investors are therefore well advised to exercise patience and hold the virtual currencies for at least a year before selling them. However, if the units of a virtual currency are business assets, the capital gains constitute business income, regardless of the one-year time limit as would apply to sales from private assets.