Introduction
This article considers the tax implications of an employer making payments to its employees in cryptocurrencies such as bitcoin and Ethereum.
The German authorities have determined that cryptocurrency is not any of the following:
- a foreign currency;
- legal tender; or
- property
Is crypto non-cash compensation?
If cryptocurrencies are given to employees for nil, or under market, consideration in exchange for providing their services then this is likely to be taxable earnings.
This ‘remuneration’ could be:
- a cash payment within the meaning of Section 8 (1) of the German Income Tax Act (EStG); or
- a payment in kind within the meaning of Section 8 (2) sentence 1 of the EStG. Pursuant to Section 107 (2) of the Trade, Commerce and Industry Regulation Act (GewO)
What is the tax position on such payments?
First of all, payments of emuneration in cryptocurrencies is taxable This is the case regardless of whether it is a cash benefit and as a benefit in kind.
The tax is levied on employees as wage tax in accordance with Section 38 of the German Income Tax Act (EStG). The tax point is at the time of the ‘inflow’ of the cryptoassets.
The tax authority will only accept euros for the payment of payroll taxes.
As such, where remuneration is paid wholly (or the majority is paid) in cryptocurrency, then some of it will need to be sold or exchanged for immediately for fiat in order to pay the tax.
How will the tax authority ever know?
This must be the most asked question to tax advisers around the world!
However, the tax office learns about cryptocurrencies through various sources, including the reporting obligations that are imposed on employers.
In addition, many crypto intermediaries require identification in order to use their marketplaces so cryptocurrencies are not as anonymous as many might believe. Indeed, transactions on the blockchain are immutable and, by and large, fully traceable.
Further, the tax authorities can also make targeted inquiries in accordance with Section 93 of the German Fiscal Code (AO) in order to obtain information.
If you have any queries about cryptocurrency or the cryptoassets in Germany, or German tax more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.