In our previous newsletter, dated 29 September 2022, we summarized the key tax issues related to the taxation of cryptocurrencies¹ and blockchain transactions

Until now, the decree from the German Federal Ministry of Finance (BMF) dated 10 May 2022² and the first-instance tax court decisions³ issued to date have served primarily as a guide for the tax classification of these digital assets. The filing of an appeal by a taxpayer against the first-instance decision in a proceeding before the Cologne Tax Court gave the German Federal Fiscal Court (BFH) an opportunity to decide on the principles of taxation of cryptocurrencies for the first time. In this newsletter we summarize the most important findings from the BFH decision of 14 February 2023.⁴

Last but not least, in the second part of this newsletter we discuss the draft BMF decree on “tax return, recordkeeping and cooperation obligations for the income tax treatment of crypto-currencies and other tokens.” 

BFH decision on the taxation of capital gains of various cryptocurrencies in the form of currency tokens 

In its decision dated 14 February 2023 the BFH has now decided on the taxation of capital gains on cryptocurrencies held as private assets in the form of currency tokens. 

The facts submitted to the BFH for decision related specifically to the currency tokens Bitcoin (BTC), Ether (ETH) and Monero (XMR). The taxpayer initially acquired BTC via a trading platform in the period from 2014 to 2016. In 2017, the year of dispute, he exchanged the BTC held as private assets for ETH and XMR and then back to BTC through numerous transactions and on various trading platforms. As a result of the exchanges, he thereby generated a profit of several million euros. The taxpayer did not engage in other blockchain transactions such as mining. 

Currency tokens are “other economic assets”

Currency tokens (such as BTC, ETH and XMR) are qualified as “other economic assets” that can be the subject of a private sale transaction within the meaning of sec. 23 para. 1 sent. 1 no. 2 German Income Tax Act (ITA). 

According to the established case law of the BFH, the term “economic asset” within the meaning of German income tax law is to be broadly defined and interpreted⁵ based on an economic approach. In principle, all assets held as private assets are included, i.e. objects and rights, actual conditions, concrete possibilities and economic benefits of any kind. Only objects for daily use are excluded. Due to the broad interpretation of the term “economic asset,” German civil law sets out that a legal position that is not transferable, or only transferable to limited extent, can be qualified as an independent economic asset for tax purposes if the tradeable part of this legal position can be transferred to a third party in return for payment and can thus be economically exploited.⁶

The decisive factor for qualifying currency tokens as an economic asset is the factual possibility of their realization via trading platforms, irrespective of their transferability under German civil law.

The currency tokens BTC, ETH and XMR are digital assets that can be used as a means of payment between the parties involved. This is not contradicted by the fact that currency tokens neither qualify as money under German civil law nor as electronic money. This is because currency tokens are individually transferable or exchangeable like real means of payment and divisible into smaller subunits. Furthermore, because they are traded on specific trading platforms or exchanges, currency tokens have a current market value and are therefore tradeable. 

This means that currency tokens have an objective intrinsic value and can thus be valued independently. The objective value is also not precluded by the fact that the tradability is subject to risk due to possible price increases or decreases. The BFH has made it clear that the related speculative potential does not justify any comparison with pure gambling. This is because, in the case of pure gambling, the chance of winning is lost at the end of the game, in accordance with the respective rules of the game. On the other hand, the (economic) owner of a currency token has an economically exploitable financial benefit according to the generally accepted standards of highly speculative investments and a determinable, customary market trading or exchange value. 

In addition, the BFH has confirmed that the qualification of currency tokens as economic assets can at least indirectly be inferred from their structural comparability with foreign currencies— even if currency tokens are not (yet) recognized as legal tender in Germany. This is because the comparability with foreign currencies results in any case from the existing acceptance of third parties for exchange. 

Tax attribution of currency tokens

The taxpayer acquired, exchanged and sold the currency tokens BTC, ETH and XMR; they are attributable to him for tax purposes in accordance with sec. 39 para. 1 German Fiscal Code (GFC).

The tax attribution of the asset is decisive for determination of the change of legal ownership in the context of acquisition and sales transactions in accordance with sec. 23 para. 1 ITA. Exchange transactions are thereby treated in the same way as acquisition and sales transactions. Currency tokens are acquired by exchanging them for FIAT-currencies (euro or another foreign currency) or for other cryptocurrencies. Currency tokens are sold by exchanging them into a FIAT-currency, for another cryptocurrency or by exchanging them back. 

In principle assets are attributed to the owner under civil law (sec. 39 para. 1 GFC). Exceptionally, assets are attributed to the beneficial owner if the latter can exclude the owner under civil law from influencing the asset by exercising actual control over the asset for its ordinary period of use (sec. 39 para. 2 no. 1 sent. 1 GFC). 

In the opinion of the BFH, contrary to the view of the first-instance tax courts and the BMF, currency tokens are already attributed for tax purposes under sec. 39 para. 1 GFC. According to the BFH’s broadly interpreted definition of the term “economic asset,” in the case of a position that is not transferable or transferable to a limited extent under civil law but is nevertheless of economic value, the attribution depends on the de facto right of control (in the sense of an unrestricted power of control). In the case of currency tokens this de facto right of control results from the ownership of a “private key.” 

No normative enforcement deficit 

In the first instance tax court proceedings the plaintiffs had repeatedly argued that the taxation of cryptocurrencies leads to taxation that is contrary to equality or otherwise in violation of the law due to a normative enforcement deficit and is therefore unconstitutional. The BFH has denied the existence of a normative enforcement deficit in the taxation of capital gains with cryptocurrencies with reference to the case law of the German Federal Constitutional Court (BVerfG).⁷ For the assumption of a taxation contrary to equality, not every actually determined implementation deficiency is sufficient. Only if the implementation deficit is inherent in the regulation itself or if frequent or even systematic violations are not consistently sanctioned and prevented, does this characterize the actual handling of the regulation and lead to the conclusion that there are normative enforcement deficits. The taxation provisions of sec. 23 para. 1 sent. 1 no. 2 ITA do not constitute a contractor-statutory provision designed to be ineffective. 

Potential enforcement difficulties due to anonymization or globalization of trade via European or non-European trading platforms do not prevent the collection of taxes. In addition, a consciously created or legally prescribed control gap cannot be identified. Instead, in the opinion of the BFH, the German tax authorities already have the possibility under the relevant legal conditions to collect the information necessary to establish facts relevant to taxation from the operators of trading platforms, within the framework of collective information requests. In addition enforcement difficulties at the international level are to be avoided in the future through the international exchange of tax-relevant data on cryptocurrencies in the form of the Crypto-Asset Reporting Framework (CARF). 

The BFH only decided on the taxation of various currency tokens held as private assets. However, the principles outlined should also apply to currency tokens held as business assets. It remains to be seen to what extent the principles outlined above can also be applied to the taxation of utility tokens and security tokens. 

BMF draft decree on tax return, recordkeeping and cooperation obligations 

On 18 July 2022, the BMF sent the draft BMF decree on the “tax return, recordkeeping and cooperation obligations for the income tax treatment of cryptocurrencies and other tokens” to associations and selected stakeholders. They had the opportunity to comment until 29 August 2022. Publication of the final BMF decree is still pending. 

In the draft, the BMF outlines the general obligations in connection with the information to be provided in tax returns and in particular on the recordkeeping and cooperation obligations for units of cryptocurrencies and other tokens held as business or private assets. Whereas the holding of cryptocurrencies as business assets creates extensive accounting and recordkeeping obligations, in addition to paper documents also data, data records and electronic documents, the extent of the holding of cryptocurrencies as private assets depends on the amount of the surplus income generated. In the case of surplus income of more than €500,000 the records and documents must be kept for six years. Below this threshold, only the general recordkeeping and cooperation obligations must be complied with. In the case of foreign matters taxpayers are subject to increased recordkeeping and cooperation obligations. This also and applies to decentralized transactions without the use of a trading platform as an intermediary (Decentralized Finance – DeFi) where there is no KYC process.⁸

In the draft, the BMF has set out a catalog of information that is generally required from tax-payers in order to prevent an estimate of the tax assessment base in the event there is doubt regarding the income from cryptocurrencies: 

• Wallet addresses and (trading) platforms used 
• Wallet balances as of 31 December of the assessment period and the previous year 
• Acquisition date and type of acquisition transaction (purchase/exchange, ICO, mining/forging, staking, lending, etc.) 
• Acquisition costs (if applicable with indication of the market price), incidental acquisition costs (e.g. transaction fees) and other costs (e.g. for the opening of an account) in euros 
• Sales date, capital gain from sales transactions (if necessary with indication of the market price) and sales costs (e.g. transaction costs) in euros
• Documentation of the selected individual consideration, average or utilization sequence 
• Total income due to the exceeding exemption thresholds 

On request, the competent tax authority will provide you with a suitable form as an attachment to your tax return. The documents can also be recorded in the form of screenshots or printouts if there are no other options. If taxpayers use special software, they must compile procedural documentation for it. In addition, the requirements regarding the inalterability of data have to be observed. However this criterion is not (yet) fulfilled by the CSV files made available for download by the software providers. 

In any case taxpayers are well advised to document the individual blockchain transactions completely, without any gaps and in a comprehensible manner. Noncompliance with the tax return, recordkeeping and cooperation obligations is at the expense of the taxpayer, even if the tax authorities must investigate the facts ex officio (cf. sec. 88 GFC). It is also important to avoid a possible disadvantageous estimate of the tax assessment base. The documentation should be provided to the tax authority as an attachment to the tax return. In the case of a delayed disclosure of cryptocurrency transactions, attention should be paid to the completeness of the documentation to counter the risk of incomplete self-disclosure. In these cases, the entire transaction history should thus be provided to the tax authority. 

Can we support you? 

The challenges of a blockchain structure as a vehicle for corporate and real estate financing or participation are technically demanding and complex in terms of the laws related to finance, data protection and tax. Should you require interdisciplinary legal advice, please contact our team. 

If you have already declared income in connection with blockchain transactions in your tax return, we recommend keeping the validity of the income tax assessments open by means of legal remedies—especially against the background of legislative development and in the case of facts not yet clarified by the BFH (e.g. mining, forging, staking, lending, airdrops, NFTs, utility tokens, security tokens, etc.). 

We are also happy to support you in any proceedings before the tax authorities and tax courts. 

1. Cryptocurrencies (also: virtual currencies) are digital units of value of currencies that are not issued or guaranteed by a central bank. Even without the legal status of “money,” they can be accepted as a medium of exchange and digitally transferred, stored and traded. This includes digital value units of currencies with a payment function known as currency tokens: in particular BTC, ETH, Litecoin (LTC), XMR and Ripple (XRP). The term “token” represents a generic term for digital units to which certain claims or rights are attributed and that have different functions: e.g. currency tokens, utility tokens or security tokens.↩
2. BMF decree dated 10 May 2022 – IV C 1 – S 2256/19/10003↩
3. Cologne Tax Court decision dated 25 November 2021 – 14 K 1178/20 (first instance); Berlin-Brandenburg Tax Court, decision dated 20 June 2019 – 13 V 13100/19; Nürnberg Tax Court, decision dated 8 April 2020 – 3 V 1239/19↩
4. BFH decision dated 14 February 2023 – IX R 33/22↩
5. Settled case law of the BFH, cf. BFH decision dated 2 March 1970 – GrS 1/69, BStBl. II 1970, 382; BFH decision dated 8 April 1992 – XI R 34/88, BStBl. II 1992, 893↩
6. Settled case law of the BFH, cf. BFH decision dated 14 March 2006 – I R 109/04, BFH/NV 2006, 1812; BFH decision dated 29 November 2012 – IV R 47/09, BStBl. II 2013, 324↩
7. Cf. BVerfG decision dated 9 March 2004 – 2 BvL 17/02, BVerfGE 110, S. 94, BStBl. II 2005, S. 56↩
8. The extensive recordkeeping and cooperation obligations regarding cryptocurrencies and other tokens held as business or private assets can result from the German Fiscal Code (GFC), various tax codes or even non-tax regulations.↩