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  • Tag Archive: Germany tax

    1. Payments of cryptocurrency as earnings

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      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.

    2. Germany cryptocurrency tax: clarification issued

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      Germany cryptocurrency tax: Introduction

      In an eagerly anticipated announcement, the German Federal Ministry of Finance (BMF) has clarified its view on the taxation of cryptocurrencies.

      In addition to the position on the buying and selling of crypto, the guidance also sets out the position on activities such as mining, staking, lending, and other transactions.

      The nature of cryptocurrencies

      The German tax man has determined that units of cryptocurrencies are economic goods. These ‘goods’ are attributable to the owner as the holder of the private key.

      In cases where the wallet and private key is managed by a third party provider (such as Coinbase or Binance) then the asset is attributable to the beneficial owner of the cryptoassets.

      Key issue: Private activity v commercial activity

      Like many jurisdictions, the key issue for determining the tax position on any profits generated is whether the transactions take place through personal activity or in the conduct of a commercial activity.

      In this regard, the BMF has confirmed that investors who hold their cryptocurrency as personal assets can sell them free of tax as long as they hold the assets for at least one year.

      This is welcome as, in previous missives, the BMF had stated that the holding period was ten years for private investors.

      This one-year period does not apply if the cryptocurrency is held as business assets.

      Again, as per other jurisdctions, in many cases the distinction between commercial and private activity might be a blurred one and is an area ripe for dispute.

      It should be noted that if cryptocurrencies are held by a domestic corporation such as a GmbH then the income is always considered to be commercial.

      Mining and Forging activities

      The authorities have also set out the position for other blockchain activities including:

      • Mining in a proof of work consensus mechanism; and
      • Forging in a proof of stake consensus mechanism

      It seems to be the case that the German tax authorities will assume that such activity is commercial in nature.

      The block creation leads to an acquisition (not to a production!) of the asset, which has to be recognized at the market price at the time of acquisition (profit-increasing). Only at the time of the realization of the proceeds from a future sale are any acquisition costs to be deducted from the profit.

      Only the staking (without taking over the block creation), as well as, if applicable, the participation in mining and staking pools or a cloud mining service may again fall within the scope of private asset management. However, again, this depends on the individual case.

      Airdrops

      The authorities has also set out its view on the acquisition of cryptocurrencies received by private investors in the context of airdrops. Here, the receipt of the new tokens may be taxable where the recipient of the airdrop has dome something in return for the airdrop.

      Perhaps surprisingly, the authority considers it sufficient for this purpose that the recipient is required to provide contact details on an online form.

      Where nothing is done in return for the airdrop then there are no tax consequences (although German gift taxes might be in point on the receipt).

      ConclusionGermany Cryptocurrency tax

      Of course, this additional clarity is helpful. Of course, the fact that an private investor can dispose of assets free of tax after 12 months is very welcome for relevant investors.

      It remains to be seen whether there will be further missives from the German tax authorities that include their position regarding Non‑Fungible Tokens (NFTs) and other types of assets and activities.

      If you have any queries about this article, German cryptocurrency tax, or the matters discussed 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

      For further resource on crypto assets please see www.cryptotaxdegens.com.