Cryptocurrencies, are increasingly gaining attention from private and institutional investors. The flagship of all cryptocurrencies is still Bitcoin. Compared to today, this “digital currency”, which was already launched at the beginning of 2009, still had a somewhat niche existence at a price of less than € 1,000 at the end of 2016. After a highly volatile development, Bitcoin was listed at over € 54,000 at the beginning of 2021, but has been subject to strong fluctuations in value since then. Meanwhile, there are more than 10,000 other cryptocurrencies (so-called altcoins), of which some examples such as Ether (Ethereum). Litecoin, Bitcoin Cash, ADA (Cardano) & Co. have also already gained acceptance among the broader masses. Funds have also started investing in Bitcoin long ago, and countless trading platforms offer interested parties a relatively easy way to invest directly or indirectly.
However, these still relatively new developments entail that both the legislator and the tax administration have only recently (and only sporadically) taken the topic of “cryptocurrencies” into account, the experience in this regard is relatively low, and the resulting planning uncertainty is sometimes very high, even for taxpayers. Particularly the consequences under income tax law were or are unconscious to many people when carrying out transactions which, in the view of the financial administration, do constitute taxable transactions.
Many investors have certainly already received the advice to continue holding cryptocurrencies if the period between acquisition and sale is not yet more than one year. In this way, taxation as a private sale transaction is to be avoided. Day trading, which can now be carried out by anyone with the help of special apps, would lead to countless taxable transactions on this basis in the opinion of the tax authorities, at least insofar as the profit generated in the calendar year is not less than € 600.
However, less investors are aware that the exchange of cryptocurrencies (e.g. Bitcoin for Ether) should also constitute a private sale transaction. Keep in mind that a few years ago, the acquisition of Altcoins could only be carried out by means of payment with Bitcoin. Thus, the taxpayer first had to acquire Bitcoins in order to be able to acquire Altcoins with this in turn. According to the tax authorities, countless taxable sales transactions were carried out in this way.
Due to the price drops of almost all cryptocurrencies in recent weeks, investors are increasingly asking themselves what options exist for the tax consideration of realized capital losses. Mirroring the realization of capital gains, the realization of capital losses is subject to the demand of investors to ensure a classification as a private sale transaction.
In the recent past, the topic of decentralized finance (DeFi) and the possible generation of income in this context by means of staking, liquidity mining and lending has also gained massive importance. But what happens to the involved coins from a tax perspective? Is it a case of a sales transaction? Are the coins to be regarded as a source of income, with the consequence that a subsequent sale constitutes a taxable sale transaction if no more than ten years have passed since the acquisition? And how are generated coins or income to be classified for tax purposes? Taxpayers will not find any concrete answers to these questions neither in the legal provisions, nor in the rulings of the tax courts, nor in the statements of the tax authorities.
In the past, this uncertainty or lack of knowledge of the risks under tax law has in many cases led to taxpayers not declaring their profits or revenue surpluses in their tax returns and thus heading down the (sometimes imperceptible) path to tax evasion. It is also likely that in the past, cryptocurrency stocks or the corresponding private keys have been transferred as gifts or as part of an inheritance without a corresponding tax declaration having been made.
At the same time, it is hardly traceable for private persons as well as for authorities which persons are involved in a transaction, especially who has received cryptocurrency stocks at which point in time. This problem is intensified by the fact that cryptocurrency stocks can be transferred not only within the network through pseudonymous or anonymous transactions, but also outside the network through a non-confirmable transfer of the so-called private key.
However, even if cryptocurrency stocks can be attributed to a specific person, any necessary access to these assets is impossible without the owner’s involvement if (only) the owner manages his private key (himself) in an offline wallet. In particular, heirs lack in many cases the possibility to access cryptocurrency assets held in the inheritance estate. Many cases are known in which persons have taken their crypto assets, some of which are worth millions, “with them into the grave”. These crypto assets are then irretrievably lost and can no longer be used by anyone.
Tax-optimized structuring in advance of an investment in or transfer of cryptocurrencies can mitigate many of the previously mentioned risk areas. In addition, cryptocurrencies offer huge upside potential for a well-prepared transfer of wealth to the next generation, not only because of their positive value development tendency, but also because of their fungibility and multiple usability. And in cases where a sale, exchange or free acquisition of cryptocurrencies has taken place without an appropriate tax declaration, your tax attorney can assist you in remedying or mitigating the damage.