Offsetting losses on futures transactions in the crypto sector

The topic of taxes has now fully arrived in the crypto space. From a legal point of view, the Federal Ministry of Finance classifies cryptocurrencies as “another economic good”. In principle, a one-year speculation period applies. This means that the sale of Bitcoin and Co. is tax-free after one year. This regulation applies both to the exchange in fiat currencies such as euros or US dollars, as well as to the exchange between the individual cryptocurrencies. However, if the cryptocurrencies are sold before the end of the speculation period, the profits must be taxed at the personal income tax rate.

New regulation causes resentment

However, the situation is different for futures transactions (example: Bitcoin futures). Here, profits are generally taxed at a flat rate of 25 percent plus solidarity surcharge and church tax, which is therefore likely to be significantly lower than the income tax rate of many. However, since January 1st, 2021, investors must observe the statutory provisions on loss offsetting in the Income Tax Act (Section 20 (6) EStG). This means that losses can only be offset against profits from futures transactions. The maximum limit is 20,000 euros. The only consolation: Losses that are not taken into account can be carried forward to the new year as a loss carryforward, but here too there is a special feature to consider, because this loss carryforward may not exceed 20,000 euros. The new regulation was initiated in 2019 by former Federal Finance Minister Olaf Scholz (SPD).

Before 2021, the situation was as follows: Financial losses from forward transactions could be offset against income from capital assets. In this case, the profits also included interest, dividends or simple price gains. It is therefore understandable that the new regulation caused a great deal of irritation among both investors and financial service providers.

“Fiscal Suicide”

However, the regulation also has far-reaching effects on the crypto space. BTC-ECHO wanted to know more about it and asked the crypto tax expert Werner Hoffmann, managing director at Pekunaasked.

With many products from the crypto sector, it is not yet really clear whether they are subject to futures transactions or not, so great caution is required here.

Pekuna-CEO Werner Hoffmann

Hoffmann uses an example to illustrate the extreme effects of the new legal provisions:

Especially in the area of ​​margin trading, high profits and high losses arise very quickly. For example, if you win €100,000 and lose €80,000, you might think that only €20,000 is taxable. Unfortunately this is not the case. Loss deduction is limited to 20,000.

Pekuna-CEO Werner Hoffmann

Ultimately, in this fictitious example, an amount of 80,000 euros would have to be taxed, which at a tax rate of 25 percent, plus solidarity surcharge and church tax, would mean a tax burden of around 20,000 euros. That is the big catch in futures trading. As Hoffmann told BTC-ECHO, he also likes to describe this to his customers as “tax suicide”.

Another special feature of margin trading in crypto assets are the so-called collaterals. Margin traders usually have to deposit this with their broker if they are doing margin trading. According to Hoffmann, in the crypto sector these are often cryptocurrencies. If the collateral is liquidated here, this is considered a sale and existing price gains that were achieved with the deposited collateral would then also have to be taxed at the price at the time of liquidation.

Are improvements in sight?

The examples given make it clear how disadvantageous the legal provision can be for many who deal with futures transactions. When asked whether positive changes could be expected in this regard, the tax expert was able to give some hope:

Since this regulation is so new, the first dependent proceedings in the tax courts will not take place until mid-2022 at the earliest. A procedure on a similar topic about the offsetting of losses on shares is currently at the Federal Fiscal Court (BFH) and there are first positive signals here, but no decision yet.

Pekuna CEO Werner Hoffmann