March 22, 2024, 7:24 am | Read time: 5 minutes
Rising prices in cryptocurrencies like Bitcoin and the growing popularity of digital currency are prompting more and more investors to put their money into this market. What tax considerations should be taken into account? TECHBOOK reveals it.
Companies, business owners, and private individuals are treated differently for tax purposes. This also applies to investments in cryptocurrencies, which are subject to taxation. This article assumes private investment transactions. The money was not invested in cryptocurrencies on behalf of another person.
Do Cryptocurrencies Have to Be Taxed?
The basic answer to the question is “Yes.” Buying and selling cryptocurrencies (Bitcoin, Ethereum, and others) are considered “private sales transactions” and are therefore taxable.
Whether an amount actually flows to the tax office depends on other factors. Important in this context: This article assumes direct investments in a cryptocurrency. The taxable person has thus purchased a cryptocurrency directly on an exchange or marketplace. Investments in crypto-based ETFs or other securities are taxed differently.
Cryptocurrencies and Traditional Securities Differ in Taxation
Anyone who opens a securities account at their bank is familiar with the “exemption order for capital gains.” Traditional investments in stocks, mutual fund shares, or ETFs are subject to capital gains tax, which is levied at a flat rate. It is often referred to as “withholding tax” because it is deducted directly at the source, namely by the bank managing the account.
In Germany, cryptocurrencies are considered other economic goods. And because trading is considered a private sales transaction, profits are taxed at the individual tax rate as part of the income tax return. The tax rate thus depends on the tax bracket and the amount of annual taxable income. In tax terms, cryptocurrencies are more akin to gold, paintings, art, or antiques.
When Do You Have to Pay Taxes on Cryptocurrency?
While private trading in cryptocurrencies is subject to taxation, this does not mean that you actually have to pay money to the tax office. This is the case under two conditions:
- The cryptocurrency or parts of it are sold within one year of purchase.
- The total of all private sales transactions exceeds an exemption limit of 600 euros for the assessment period 2023 and before. After the passage of the Growth Opportunities Act, this limit will increase to 1,000 euros for the year 2024 and beyond.
So, if you bought Bitcoins 366 days ago, you don’t have to pay taxes on the proceeds from the sale. This speculation period starts anew with each purchase. Taxes are only payable on a sale within the period if the income exceeds the exemption limit.
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How and Where to Pay Taxes on Cryptocurrencies?
If you invest your money in cryptocurrencies, you don’t need to report the holdings and their value to the tax office. Only when profits (or losses) arise do they need to be reported in a tax return. If you don’t already have to file a tax return because of income from self-employment or rentals, you must do so as an employee.
The income is reported in the income tax return in the “SO” form for “Other Income.” There is a section for “Other Economic Goods.” Filling out the form is not difficult. You need to enter the date of purchase, sale, as well as the purchase price and sale price. Therefore, it is also important to keep track of the transactions themselves to be able to provide the necessary information.
What Applies to Past Transactions?
If you only now realize from reading this article that you failed to report your profits from cryptocurrency investments to the tax office in the past, you should act as quickly as possible. The best course of action is to review the transactions of the past ten years and determine the profits for each year.
Preferably in consultation with a tax advisor, you should then prepare a correction of the tax return for the affected year. Tax experts know best how a letter to the tax office should look to ensure the correction is accepted and does not lead to further complications.
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Can the Tax Office Verify Sales?
Regarding tax payments, the legal situation is clear. Taxpayers are subject to a duty to cooperate. They must disclose their earnings from cryptocurrency trading and pay taxes on them. In particularly severe cases, even imprisonment may be threatened. At the very least, back payments, late fees, and penalties are to be expected.
Even if it might be tempting to hide profits from cryptocurrency trading and not pay taxes, it is by no means a good idea. Officially licensed exchanges and marketplaces are required to verify the personal data of their customers. This means that the Federal Central Tax Office (BZSt) can also verify whether a taxpayer holds or has sold cryptocurrencies if there is any doubt.
In 2022, the Federal Ministry of Finance issued a letter to the tax authorities, providing guidance to tax offices on how to assist in cases of doubt regarding the representation of taxpayers. In such cases, the authorities can request numerous data and information, including IDs of individual transactions.
If the exchange or marketplace does not provide a statement of individual transactions and taxes due, it is advisable to create such an overview yourself, for example, in Excel.
What About Losses?
Cryptocurrency prices are very volatile. Thus, it can happen that you pay more for a coin than you get back when you sell it, resulting in a loss. But what about taxes in this case?
The situation is different when the loss is “realized.” This means that coins are sold at a loss. If this happens within the year, the loss can be offset against profits from cryptocurrency trading in the same year.
All tips and information mentioned in the text do not constitute investment advice or a recommendation to buy or sell securities (§ 85 WpHG).