German Court Rules on Cryptocurrency, Investor Calls €3.4 Million Profit “Stupid Tax”
Bundesfinanzhof delivers its first verdict on virtual currencies as an investor labels €3.4 million profit as mere data and refers to it as a “stupid tax”.
In a groundbreaking ruling, Germany’s Federal Fiscal Court (Bundesfinanzhof, or BFH) has decided that cryptocurrency profits are subject to taxation, just like traditional assets. Crypto investors must report these profits in their income tax return, following the rules for income from private sales transactions. The BFH ruled that cryptocurrency is a type of asset that is subject to income tax for private sales transactions within one year of acquisition and sale, unlike stocks where gains are tax-free if held for longer.
The highest German financial court made this decision about 15 years after the introduction of Bitcoin, following a case brought by a private crypto investor from Cologne who had purchased, traded, and sold various cryptocurrencies.
The investor had partially entered into purchase contracts with providers of crypto assets on digital trading platforms based on current prices. Additionally, he had made exchange deals with cryptocurrencies in his portfolio. In his tax return for 2017, the investor reported a crypto gain of around €3.4 million.
The tax dispute arose between the investor and the tax authority, which had argued that the profit was subject to income tax. The investor argued that a crypto gain is a data set and therefore cannot be qualified as an income tax-liable “asset.” He also argued that structural implementation deficiencies stood in the way of taxation. The state could practically only tax gains from crypto transactions if a taxpayer explicitly stated that he had invested in crypto assets.
Consequently, only the honest taxpayer would pay taxes on successful crypto transactions, which he deemed unconstitutional. The Cologne tax court did not agree with the investor’s arguments and dismissed the case in 2021. Similar cases in other German federal states were also dismissed except for one in Nuremberg, which expressed doubts about the taxability of speculative gains from cryptocurrencies.
The BFH has now decided that crypto profits are “other assets” within the meaning of income tax law. “The term ‘asset’ is to be interpreted broadly,” the court stated. It included “concrete possibilities and advantages, the acquisition of which a taxpayer incurs costs and which are subject to a separate independent evaluation according to the general public opinion.”
This is the case with virtual currencies. Bitcoin, Ethereum, and Monero are economically considered payment methods that are traded on platforms and exchanges. They have a market value and can be used for payment transactions between the parties. The BFH thereby supports the legal opinion of the Federal Government, which the Federal Ministry of Finance had outlined in a guideline on the treatment of tax on earnings from bitcoins and other cryptocurrencies in May 2022.
Regarding the investor’s claim that only the honest taxpayer pays taxes on crypto gains, the BFH responded that there was no structural implementation deficiency. There are no collection rules that would preclude taxation, nor are there indications that the tax authority is unable to record gains and losses from crypto transactions. The BFH classified cases where investigative measures, such as collective information requests, were unsuccessful, as “isolated cases” that did not constitute a structural implementation deficiency.
It is unclear how much revenue the German government generates from taxing crypto transactions. The new BFH ruling, however, establishes clear guidelines for the taxation of cryptocurrency profits and clarifies that investors must report such gains in their tax returns.
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