Article dated September 6, 2021
Neustadt an der Weinstrae (ots) Crypto currencies such as Bitcoin, Ether or Ripple have long been considered niche phenomena, but are now also of interest to private investors. But be careful: Not only trading, but also exchanging or purchasing with cryptocurrency can be tax-relevant. What private investors should still pay attention to and what the holding period, Fifo method or offsetting losses mean in connection with cryptocurrency and taxes is explained by the United Wage Tax Aid Association (VLH).
Classic forms of investment: the bank takes care of the final withholding tax
As a rule, private investors with stocks, fund units and other regulated investment products in their custody account hardly ever come into contact with the tax office: the banks may offset profits against losses and pay the withholding tax for them.
It is different with cryptocurrencies. The Federal Financial Supervisory Authority, or BaFin for short, has classified Bitcoins & Co. as units of account. Crypto currencies are therefore not legal tender, cash holdings in virtual currencies are therefore legally neither treated as (foreign) currencies nor as capital investments. But as so-called other economic goods. And that means: Profits and losses from crypto currencies can be relevant for the tax return.
Investment form cryptocurrency: private investors have to take care of themselves
For example, if you as a private investor sells Bitcoins at a profit within a year, you will achieve speculative profits that are subject to the regular income tax rate. For the tax office it makes no difference how this profit is generated. That means: Anyone who trades in crypto currency, exchanges it for real currency or uses it to buy something, which is already possible at some retailers, may have to state their profits in the tax return.
The decisive factor for the question of whether and how much taxation profits are taxed is the date on which the digital currency was purchased. There are two scenarios for this:
Holding period of more than one year: tax-free
For private investors who bought Bitcoin & Co. more than a year ago, the matter is simple: Your taxable profits remain tax-free. There is one restriction, however: if you earn interest with the cryptocurrency, not only is the withholding tax payable for the interest, but the so-called speculation period also increases from one year to ten years.
Incidentally: The Federal Ministry of Finance has published a draft letter on the taxation of crypto currencies, which for the first time also comments on the taxation of income from Proof of Stake (PoS). According to this, a speculation period of ten years would apply to staking if the holding of cryptocurrencies leads to the allocation of further units. This means that, according to the BMF, cryptocoins used for staking can only be sold tax-free ten years after acquisition. Since the subject is quite complex and also controversial, the VLH recommends that you seek tax advice in this case.
Holding period of less than one year: taxable
Anyone who only holds the bitcoins for a few months and then sells or exchanges them for a profit must tax the profit at the personal tax rate. However, there is an exemption limit that helps you save. Because private taxation transactions remain tax-free up to an exemption limit of 600 euros per year. But be careful: the exemption limit should not be confused with the exemption. Anyone who is even one euro above the exemption limit has to pay tax on all of their income.
By the way: The exemption limit applies to all private sales transactions for a year. That means: If a private investor has sold assets such as gold, jewelry or paintings within a year in addition to income from Bitcoin trading, he must add up all the profits from a year. Private sales are only tax-free if his profit remains below 600 euros.
Determine profits using the Fifo method
The sales profit results from the difference between the sales price achieved and the purchase price of the cryptocurrency. The problem: Like stocks, cryptocurrencies are subject to price fluctuations. So the question is which order of purchases and sales must be adhered to. The answer: Basically, Bitcoin & Co. uses the FIFO method. Fifo stands for “First in, first out” and means that, for example, the bitcoins bought first are offset against the bitcoins sold first. The VLH therefore recommends that all Bitcoin transactions that a private investor conduct are documented in detail. In this way, in case of doubt, he can provide the tax office with precise evidence.
Losses can be offset
As with stocks, losses from Bitcoin trading can also be offset against: either with profits from the previous year or, thanks to losses carried forward, with future profits. However, losses from private sale transactions can only be offset against such profits – and not with profits from, for example, stock transactions.
From a formal point of view, it works like this: On the first page of the tax return, a private investor with cryptocurrency losses must tick the item “Declaration for determining the remaining loss carryforward”. As a result, the tax office will separately determine for him in a “notification of the separate determination of the remaining loss carryforward” whether a loss carryforward is possible and how much it will be. This loss assessment notice is issued separately for married couples, usually together with the tax assessment. The result: the tax office remembers the amount of the loss in the current year and deducts the loss from the income in the coming year. This will reduce the taxable income in the coming year.
VLH tip: Have profits and losses balanced
The subject of cryptocurrency and taxes is highly complex, especially for those who are not tax-free. Therefore: Anyone who invests in cryptocurrency should have their broker or financial institution document and offset the profits and losses that have arisen within a year. With this evidence, private investors can state the relevant sums in their tax return or transfer the whole thing to a VLH advisor.
The VLH: largest wage tax aid association in Germany
The wage tax aid association United Wage Tax Aid (VLH) is Germany’s largest wage tax aid association with more than one million members and around 3,000 advice centers nationwide. Founded in 1972, the VLH also provides most of the DIN 77700 certified consultants.
The VLH prepares the income tax return for its members, applies for exemptions, determines and applies for grants and allowances, checks the tax assessment and a lot more within the scope of the legal advisory authority according to paragraph four, number eleven of the Tax Advisory Act.