Taxes on Cryptocurrencies with Pekuna

September 9, 2020 by Philip Filhol

Since the establishment of Bitcoin in 2009 cryptocurrencies are becoming increasingly more popular. This applies to both, the private- and the business-sector. Since the immense increase in value in 2017, the topic has been brought to the attention to the mainstream-media. This of course brought the attention of the tax authorities towards cryptocurrencies too. In the past the tax authorities have expanded their investigations regarding income made with crypto which even lead to the involvement of special forces (Steuerfahndung).

BerChain is co-hosting a webinar with our member Pekuna where you can learn all about this interesting and important topic. It will start on October 15 at 6:00 PM and approximately end at 7:30 PM CEST.
Be sure to sign-up for the webinar on eventbrite!

For the ones who can not attend to the webinar or would like to inform themselves beforehand you can read this article which will serve as an introduction to the basics of taxes for cryptocurrencies and support you on your way of keeping a healthy distance to the tax investigation department. This article is for information purposes only and does not constitute or replace tax or legal advice.

What should every Cryptocurrency trader know about taxes?

There is still very little legislation (Rechtssprechung) related to cryptocurrencies and hardly any official documentation. The decisions of individual tax offices may, therefore, differ in detail from the advice presented here.

In this article we will cover the following topics related to cryptocurrencies and tax law: 

Cryptocurrency Trading 

Trading in cryptocurrencies is the process of an individual buying cryptocurrencies with the anticipation to sell them at a profit later. The coins can be private or business assets.

A private purchase, sale, or exchange of cryptocurrencies is considered a “privates Veräußerungsgeschäft” (private sale transaction) according to § 22 no. 2 and § 23 paragraph 1 no. 2 EStG (Einkommensteuergesetz). It should be noted that there is an exemption limit of €600, (§ 23 (3) sentence 5 EStG), meaning that profits lower then €600 are tax-free. If the profit is higher then €600 per tax year, then everything must be taxed. 

People will often exchange one cryptocurrency for another. In such situations, it is important to know the value of the cryptocurrencies at the time of the exchange. This information is necessary for calculating the taxable amount of the assets later on.
The German tax law states that, if more than one year has elapsed between the purchase and the sale, the transaction is not taxed, and the entire profit is tax-free. You can find the relevant information in regards to this law under § 23 (1) no. 2 EStG (Einkommensteuergesetz). It is, therefore, advisable to hold onto these assets for over a year before selling. For any losses in value, it is important to recognize this quickly. For tax purposes, it is recommended to sell these assets within one year and harvest the tax loss rather than hang on to them.

FIFO Method (First-in, First-out)

Since cryptocurrencies are abstract economic goods that cannot be assigned individually, it is not easy to calculate the purchase costs. For the most part, the FIFO method (First-In, First-Out) is used for calculating this. Per the law, this method must be used for all foreign currencies (§ 23 (1) No. 2 S. 3 EStG). Under current legislation, cryptocurrencies are not (yet) considered foreign currencies; however, this calculation method is accepted and recognized by most tax offices.

If the cryptocurrency holder has several wallets with different purchase costs, the actual purchase cost must be calculated for each wallet. This situation is particularly complicated as the FIFO chain must be calculated separately for each wallet. In addition, if a user transfers their cryptocurrency from one wallet to another, they must ensure the purchase costs and the purchase dates and times are also carried over.

Mining Cryptocurrency

Mining cryptocurrencies, like Bitcoin, is generally considered a business activity. This means that mining comes with all the same obligations as any other business venture. If you start working in this field, you are required to register it as well as provide accounting and bookkeeping for this business. You must also pay taxes on the mined coins. 

In principle, anyone can become a miner. However, these days it is only worthwhile with specially designed computers that are often located in regions with low electricity costs and good conditions for cooling computers. Therefore it is not very common to have mining facilities in Germany.
Cloud mining, on the other hand, is usually not considered as a business activity but as a purchase of a variable amount of coins for a fixed price. Also, mining on a small scale with the goal to explore technology rather than make a profit can be considered private, but this is determined on a case by case basis. 

Cryptocurrency as Business Assets

There are several reasons why companies have crypto as part of their company assets. The most common one is that they accepted cryptocurrencies as a payment method for goods and services they are providing. Having crypto in the company comes with several challenges, especially in bookkeeping and with reporting. The German compliance regulations are very complicated related to this topic. 

In 2017 and 2018, many companies developed and sold their own coins. Premade systems had simplified this process so much that new cryptocurrencies could be generated with little technical effort. Due to the complexity of the taxes related to this topic and the many different scenarios surrounding this, we will not go over this subject in this introduction.

Cryptocurrency Day-to-Day Challenges

The taxation of cryptocurrencies is a complicated field that is discussed in detail in tax literature. There are numerous articles on this subject that address many different interpretations of the situation. In practice, there are also many challenges, such as including or educating tax advisors in the discussion and management of cryptocurrency.
In addition, there are no central offices, such as a bank, that creates reports and statements for cryptocurrency assets. The data preparation and the calculation of profits continue to pose the key challenges in taxing cryptocurrency. Pekuna is focusing on the topics of educating tax advisors and creating tax reports for crypto to make this process easier.

Getting Caught

It is still a widespread argument in the crypto scene that one will not get caught by the tax office because cryptocurrency is decentralized and encrypted. This is not the case. There are certainly people who manage to make large gains and not report to the tax office, however, most people do not consider the amount of information the tax office has these days. If a student is suddenly driving a Lamborghini without having any obvious income, it will raise many questions. In addition, the process of paying out crypto to fiat is often more complicated than one might think. The banks must do certain checks regarding anti-money-laundering—many of the crypto transactions will require these checks to be released.

In addition, the number of centralized tools used in crypto trading should not be underestimated.  Exchanges will often hold personal information, such as your bank details. Combined with your transaction history, this can easily be used to trace all your data. Exchanges like bitcoin.de and Coinbase are already working with officials and sharing your information. 

About the author

Werner Hoffmann holds degrees in tax law and computer science. He has spent his professional career at the intersection between tax law and computer science–first as a developer at the Bavarian State Office for Taxes, then as a product manager at a tax startup. He currently works as a co-founder for Pekuna (www.pekuna.de). Pekuna is a service that evaluates cryptocurrency income. Personally, Mr. Hoffmann has been interested in and invested in cryptocurrencies for many years.