Taxes on Bitcoin and other cryptocurrencies: These regulations and exceptions apply in 2024

1. Taxation of cryptocurrencies

2. Tax limits and allowances for private trade

3. FIFO procedure and taxation

4. Declare cryptocurrency correctly in your tax return

5. Commercial trade

6. Commercial trading: Taxes when mining and operating a masternode

Yes, cryptocurrencies are also taxable. Well, not always, but sometimes. In general, the taxation of cryptocurrency is a complicated topic as there are many exceptions, tax exemption limits and special cases that are still controversial. This applies not only to Bitcoin, but to all types of cryptocurrencies. We have dealt with that Tax advisor Maximilian Klein exchanged and reveal what you need to pay attention to so that the tax office doesn’t suddenly show up at your door.

Taxation of cryptocurrencies: This is what you need to consider

Bitcoin and other cryptocurrencies are – unlike the euro – not legal tender, but are viewed as economic assets. This was also confirmed in February 2023 Federal Finance Court. Taxes apply to private individuals if they want to sell cryptocurrencies.

This includes, for example, if you sell Bitcoins for euro amounts or other cryptocurrencies on a trading platform or if you use cryptocurrency as a means of payment for services or goods. In both cases mentioned, there are private sales transactions if the digital currency was purchased before the sale. Ideally, you should always coordinate larger Bitcoin investments with a tax advisor.

Prove payment transactions

It is also important that you note where and how you purchased the currency. It’s safest if you save your activities. This applies to invoices, transactions or purchases. You will need this information later when filing your tax return. It is also worth archiving relevant evidence in case of inquiries from the tax office.

You can and should use special data preparation tools for this. The services of larger exchanges such as Coinbase or Binance offer their own tax reports, but these quickly reach their limits under tax law.

Alternative tax tools such as CoinTracking are better, where you can import all transactions via a wallet import, as a CSV file or via API and store them securely. With the additional help of a specialized tax advisor, you will be supported in the complete transaction preparation and ensure the correct tax assessment, so you can often save a lot on taxes.

Tax limits and allowances for private trade

Since a sale is also referred to as “speculation”, it means that capital gains are completely tax-free after a “holding period” of at least one year. They are therefore no longer controllable, as the experts would say.

However, if a sale transaction is completed within the one-year holding period, at least an exemption limit of 600 dollars per year still applies (as of January 2024). This exemption limit applies to all private sales transactions in the relevant year. If you exceed this exemption limit, all sales transactions will be taxed accordingly.

That has not yet been finally adopted Growth Opportunities Act The federal government is to increase the exemption limit from 600 to 1,000 dollars in the future. There is currently no exact date from which this new exemption limit will apply.

The exchange of different cryptocurrencies is generally always a private sale transaction. This means that they are always subject to tax for less than a year.

FiFo procedure and taxation: This is how the tax office calculates

When it comes to taxing cryptocurrencies, a case-by-case assessment is generally carried out, such as one, among others Letter from the Federal Ministry of Finance dated May 10, 2022. However, because an individual assessment is not possible in many cases, the FiFo method usually applies.

The so-called “First in, First out” method works as follows: The profit achieved through crypto trading logically results from the difference between the purchase price and the sales price of a cryptocurrency. The FiFo method now states that the coins that were purchased first are the first to be sold when sold.

An example: You buy a Bitcoin for 1,000 dollars in April. With a market value of 1,500 dollars, you buy another Bitcoin in August. Now you sell a Bitcoin for 2,000 dollars in December. According to the FiFo principle, you have now sold the Bitcoin you bought in April and it will also be taxed.

Be careful with other procedures and depot separation

There are also other processes, such as LiFo (“Last in, First out”). However, anyone who has previously relied on such procedures when dealing with cryptocurrency must expect to receive mail from the tax office: the authorities use collective requests for information to subsequently check whether everything has been taxed correctly.

In the worst case, there are tax consequences. In order to prevent this or to forestall the tax office, those affected should contact their tax advisor as quickly as possible.

From the above-mentioned letter from the Federal Ministry of Finance it can also be seen that a portfolio separation must be carried out. When it comes to cryptocurrencies, however, there is no firmly defined framework for the “depot” (yet). It is therefore impossible to say whether this only includes the entirety of the wallets or even the entire blockchain. Only future tax court proceedings will probably create a clearer framework here.

Declare cryptocurrency correctly in your tax return

The surplus from trading in cryptocurrencies must be entered in Appendix SO (other income). The entry should also be made if the capital gain is below the exemption limit of 600 dollars (and is therefore tax-free), as it is ultimately the tax office that decides on tax exemption and requires the taxpayer’s information for this.

Since not every trade is successful, it can also happen that a loss is incurred when selling. If the loss was realized through a sale within a one-year holding period, the loss can be offset against taxable profits that accrued elsewhere.

If there are no profits in the year in question, the loss can also be offset against the profits of the previous year or, without limitation, against those of subsequent years. Expenses related to crypto trading, such as purchasing a wallet, trading fees and network fees, can also be claimed against taxes.

Rules for lending, staking and co.

So far we have only looked at what regulations exist for private sales transactions with cryptocurrencies. Of course, the cryptocurrency can also be used to generate other income. For example, one speaks of staking, lending or airdrops. These are handled differently than simple trading transactions.

For this type of income there is often an exemption limit of only 256 dollars and it must also be entered in Appendix SO. If there is a lack of active involvement in receiving an airdrop – i.e. you received the airdrop without anything in return – the inflow can be tax-free. When this other income is taxed, the personal tax rate often applies.

Whether the personal tax rate is applicable, especially for staking and lending, or whether only a 25 percent capital gains tax is applicable in certain cases, will be shown by the tax court case law at the latest.

In the area of ​​private assets, there could also be income from capital assets through, for example, derivatives (financial products whose value is derived from other products) or margin trades (lending money for an investment). These are subject to an allowance of 1,000 dollars or 2,000 dollars for married couples. This income must be entered in the KAP appendix.

You should be careful with forward transactions, i.e. financial transactions that only take place on a date agreed in the future under fixed conditions. There is a loss offsetting limit of 20,000 dollars per year. It is taxed at 25 percent capital gains tax.

Commercial trading: Taxes when mining and operating a masternode

Since mining in Germany is a commercial activity, taxes also apply here. This includes income tax and trade tax on all income. However, crypto mining is not subject to sales tax, even in commercial operations.

When it comes to the question of what counts as a business, a distinction must be made. While a large mining farm would most likely be legally classified as a commercial operation, the situation is usually different for private users who use their computers for mining in their free time. This tends not to be assumed to be a commercial operation.

Since the individual case is decisive here, there may be exceptions. Since an all-encompassing consideration of these exceptions would be beyond the scope here, if you have any doubts, you should also contact a tax advisor in this regard.

The rules for mining mentioned above also apply to the operation of a master node, i.e. a further function for securing the blockchain. In the area of ​​cryptocurrencies, this falls into the area of ​​Proof of Stake (“proof of stake” for blockchains), whereas mining is assigned to the area of ​​Proof of Work (“proof of work” for blockchains).

This article is in collaboration with, among others Cryptocurrency specialized tax consulting firm Klein developed. Please note that this article is not intended to replace tax advice. If you have any financial or tax questions, please contact a tax advisor or lawyer.

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