New millionaire through Bitcoin: The cryptocurrency is writing a success story. But how much tax do you have to pay on your new wealth?
Anyone who invests in cryptocurrencies needs strong nerves and patience. In return, the chance of high profits beckons. If you had bought a Bitcoin in March 2020, you could have sold it in April 2021 with a profit of 40,000 euros – that is a gross annual salary for many Germans. Every investor is happy about such profits – but the question also quickly arises: What share does the state want from it? Because even if the tax office does not recognize Bitcoin and Co. as currency, it looks closely at your profits from such transactions.
Do I have to pay taxes on bitcoins?
Yes, you also have to pay taxes on cryptocurrencies like Bitcoin or Ethereum – but only under certain circumstances. This is because BaFin does not classify Bitcoin and other cryptocurrencies as legal tender.
“The sticking point is that cryptocurrencies are not legal tender, but are considered units of account,” explains Hartmut Schwab, president of the German Federal Chamber of Tax Advisors. “These are comparable to foreign currencies, so the same principles apply to the purchase and sale of cryptocurrencies by banks as to foreign currency transactions.”
Currently, cryptocurrencies such as Bitcoins fall under the category of a private sale transaction for tax purposes, thus Section 23 (1) Sentence 1 No. 2 EStG applies. Profits from trading cryptocurrencies are thus treated similarly to profits from the sale of real estate, rare works of art or classic cars, where taxes only apply under certain circumstances.
Important: There is an exemption limit of 600 euros for private sales transactions. If your profit exceeds this exemption limit, you must pay tax on the entire amount. It is therefore not to be confused with the exemption amount of 801 euros for share transactions.
Shares: You have to pay these taxes
In addition: The exemption limit adds up all sales that fall under the category of private sales transactions. So if you have already sold a classic car, your tax-free allowance is already used up – and your Bitcoins are therefore taxable.
It is therefore worthwhile to check exactly how many Bitcoins you are selling. Because: As long as you hold Bitcoins in your wallet – i.e. your digital purse – you do not have to pay tax on them. These tax principles apply to all cryptocurrencies – so it doesn’t matter whether you buy or sell Bitcoin, Ethereum (more on that here) or Cardano.
When do I not have to pay taxes?
Since Bitcoin is not taxed in the same way as, say, gains from stocks, your gains from cryptocurrencies may be completely tax-free. And in this case, if you hold your coins for over a year and then sell them for a profit, you won’t have to pay tax on it.
But beware: if you bought something with the Bitcoins in between or exchanged them for another cryptocurrency in the meantime, this rule does not apply to you. Example: If you bought a Bitcoin for 4,300 euros in March 2020, you could sell it for 44,700 euros in April 2021 – and the profit of 40,400 euros was tax-free. But that only applied if you didn’t use your Bitcoins in the meantime.
“When exchanging one cryptocurrency for another within one year of acquisition, it is a private sale transaction,” says Hartmut Schwab, president of the Federal Chamber of Tax Advisors. The value of the transaction is the current currency value on the stock exchange, he said.
In this case, you have generated income with your Bitcoins and the speculation period increases to ten years, explains tax consultant Christoph Juhn in an interview with “Finanzfluss”. If you sell your cryptocurrencies during this time, your profits are taxable again. In expert circles, however, this regulation is quite controversial.
Taxes on Lending and Staking
The same also applies if you engage in so-called staking, for example with currencies such as Cardano, or lend your cryptocurrencies in exchange for interest payments (lending). In this case, too, you generate income with your “other asset” – your coins. You must also pay tax on these profits. However, a different exemption limit applies here than for the sale of cryptocurrencies.
The interest from lending out your coins or from staking, the holding back of cryptocurrencies to receive rewards, is considered “income from services within the meaning of Section 22 No. 3 EStG”. There is an exemption limit of 256 euros per year here, you have to pay tax on all profits from staking or lending that exceed this amount. You have to enter the profits or losses of your cryptocurrencies on your tax return under the SO filing – for other income. If you only hold Bitcoins or have only sold them after a holding period of one year, you are not required to include them in your tax return. It is even possible to get a home loan, learn more about cryptocurrency lending at http://www.bitcoinp2ploans.com/bitcoin-home-loan/. But always keep in mind, what it means regarding taxation.
The tax rate for cryptocurrencies is significantly higher than for capital gains, such as from stock transactions. The speculation tax in Germany is 25 percent – with Bitcoins and Co. on the other hand, the state uses your regular tax rate. This means that you may also have to pay the solidarity surcharge and church tax on your Bitcoin profits. When filing your tax return, you first have to declare only the amount of your profit from the sale of cryptocurrencies. If the tax office subsequently wants further data on the purchase and sale, you will have to submit this data subsequently. For this, it is worth creating a spreadsheet with your purchases and sales – especially if you own more than one coin or buy cryptocurrencies more frequently. When filing your taxes, you can then fall back on two methods to tax your sales.
The FIFO method
In the FIFO method – first in first out – you sell the coins that you also bought first.
Example: you bought two bitcoins on March 5, 2020 and two bitcoins on March 10, 2020. Now, if you want to sell three Bitcoins on April 15, 2021, you offset them with the two Bitcoins from March 5 and one Bitcoin from March 10.
The LIFO method
With the LIFO method – last in first out – it’s the other way around: here, you first sell the coins or fractions of them that you bought last. However, since cryptocurrencies are only tax-exempt after a holding period of one year, the FIFO method is recommended when filing your tax return.
Important: If you have chosen a method when filing your tax return, you must pay tax on all gains from crypto transactions this way.
Can I deduct my Bitcoin losses from my taxes? Yes, you can deduct your Bitcoin losses from your taxes. However, the same principle applies here as for losses from capital transactions. Here, too, you can only offset losses from shares against gains from shares, for example. Bitcoin losses can therefore only be offset against gains that also qualify as private sales transactions – for example, the sale of a property, foreign currency, works of art or cryptocurrencies.
If you have not made a profit on such goods this year, you can also carry forward the loss to future years without a limit. If you subsequently make profits with Bitcoins and Co. the loss of the previous years will reduce your tax burden on the Bitcoin profit.
How does the tax office know about my cryptocurrencies? Currently, it is still very difficult for the tax office to trace which citizen holds and trades cryptocurrencies. The largest crypto exchanges are not based in Germany, but in the USA or Malta.
The data is therefore not directly accessible to the tax office. “Since there are no reporting requirements for cryptocurrencies yet, member states do not exchange financial information in a uniform manner,” says Bundessteuerberaterkammer President Schwab.
But that could soon change. “The EU and the OECD are working flat out on concepts to record and tax income from cryptocurrencies,” Schwab said. The goals of these efforts are clear, he said: cryptocurrencies and electronic money are to be subject to reporting requirements in the future. In addition, European crypto exchanges and wallet providers are to be required to identify their customers and report suspicious circumstances.
Also don`t miss to read this related article https://www.pcmag.com/news/cryptocurrency-and-taxes-what-you-need-to-know, it clears a lot of things up.
Will there soon be a separate crypto tax?
The paragraph that cryptocurrencies currently fall under is not designed for cryptocurrency use cases. Currently, the exact documentation is cumbersome and difficult to follow for customers as well as for the tax office – especially when currencies are exchanged among each other.
In a recent case, judges at the Nuremberg Fiscal Court also expressed doubts as to whether the sale of cryptocurrencies actually falls within the scope of private sales transactions. So the taxation of Bitcoins could actually change in the future – especially if investors increasingly use it as an additional investment opportunity.