Federal Ministry of Finance tightened taxation of crypto currencies

Politicians are currently taking constant fire on the crypto market. The Federal Ministry of Finance (BMF) wants a uniform framework for the taxation of crypto currencies and has presented a draft that will tighten the thumbscrews for investors in the future.

The Federal Ministry of Finance puts the magnifying glass on the crypto market. Just a few weeks ago, the BMF presented a draft for the crypto value transfer ordinance, which in future will make financial service providers more subject to due diligence. Even with the tiresome subject of taxes, there are now signs of some cosmetic interventions. In a draft that has not yet been published, which was initially issued to the highest tax authorities in the country and is exclusively available to BTC-ECHO, the taxes on trading in crypto currencies are significantly tightened.

Miner under general suspicion

In the mining sector in particular, the draft provides for higher tax burdens. In principle, the draft does not initially differentiate between private and commercial mining activities. Specifically, this means that the tax authorities “rebutably suspect” that mining is generally the income of a commercial enterprise, regardless of whether one is connected to a mining pool or, for example, operates cloud mining. The provision of computing power alone can therefore be interpreted as participation in economic activity, which is why the offices can in principle assume income from a commercial enterprise.

The terminology “rebuttable presumed” means that the burden of proof ultimately rests with those concerned. Mining income can therefore also fall under private sales transactions. In that case, however, it would have to be proven that the activity is asset management. This in turn represents a major hurdle. After all, mining cryptocurrencies requires considerable computing power with the associated hardware equipment and, if necessary, appropriate rooms for the mining rigs. These aspects could serve as an argument to tax crypto mining as a commercial rather than an asset management activity. So the small difference has far-reaching consequences. In the case of a commercial activity, business taxes could then also be incurred on income such as block rewards.

Biggest common denominator for cryptocurrencies

Whether cryptocurrencies are taxable at all depends on whether they are classified as an asset. This was previously a loophole in the law and left room for conflicting interpretations. So decided that Finance Court Berlin-Brandenburg 2019to define all crypto currencies as an economic good and to tax profits from speculation with them. The Nuremberg Tax Court In 2020, however, expressed doubts about this and criticized the decision because of the equality of Bitcoin with all other cryptocurrencies.

The BMF draft now creates clarity and takes the side of the Berlin-Brandenburg Finance Court. Every cryptocurrency, whether payment or utility token, falls under the category of economic good and is accordingly taxable.

Increase in the holding period

Staking has also posed some problems for the tax authorities so far. The special feature: cryptocurrencies such as ether can be used for staking in order to achieve rewards in the form of new ethers – ad infinitum. So profits are delayed over time. The ethers originally used could be tax-free in the model after a one-year holding period.

But this is exactly where the design strays between. The holding period will be increased from one to ten years. Sales transactions with cryptocurrencies that take place before this period expires are therefore taxable. This applies to both staking and, for example, lending. The draft therefore initially assumes that cryptocurrencies were used as a source of income, since they were used to generate further cryptocurrencies. Stakers should therefore make advance payments and subsequently notify the tax office of the information that they have used cryptocurrencies for staking. In a second step, legal action could be taken against taxation.

Design not yet finalized

The draft is still subject to change and is initially to be understood as a recommendation for tax offices. Even if the thrust of taxing cryptocurrencies uniformly becomes clear, the text still has to be evaluated by the specialist public. After evaluation by the associations, the final version, which is initially binding for tax offices, could appear in a few months. But even then it is initially an administrative instruction for the implementation of the tax specifications. It will take a few years before the draft has passed through all judicial instances. For the offices and consumers, however, the letter will serve as a basis until then.

Cryptocurrencies, expensive fun

Opinions are divided on the draft. On the one hand, the Federal Ministry of Finance creates clarity after years of uncertainty, as Frank Schäffler, member of the German Bundestag for the FDP, explains to BTC-ECHO:

After 8 years, the BMF has finally acted and answered individual questions. This is an important step for legal security in Germany. Many detailed questions that were previously only inferred or assumed are now answered (order of consumption, fork, mining, etc.).

Frank Schäffler, Member of the Bundestag

But there is still a need for clarification with regard to the increase in the holding period: “It is unclear whether the sale period will be extended to 10 years if cryptocurrencies are used as a source of income”. At this point it must be formulated more clearly which area the extension refers to, says Frank Schäffler: “Does this already apply to forks or staking or only to lending?”

Full taxation of cryptocurrencies

Overall, investors have to be prepared for better or worse crackdowns and higher tax levies. In conversation with BTC-ECHO has a lawyer and tax expert Martin Figatowski the situation summarized:

As far as the key points of the BMF letter are already known, the content is likely to be a great disappointment for many crypto investors. Initially, the tax authorities are assuming that the tax holding period for private sales transactions will be extended from one year to 10 years for staking, lending and masternodes. Furthermore, the commercialism should be presumed to be refutable in mining. Finally, Airdrops are generally to be recorded as other income or, alternatively, taxed as a gift.

Martin Figatowski, attorney at law

The financial administration is pursuing “obviously the intention to fully tax almost all processes related to crypto currencies”. Hodlers and traders are likely to have to dig deeper into their wallets in the future with a view to their tax return.