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February 25, 2022

DAT.AG

Crypto soon be subject to tax in Germany!

As the Ministry of Finance of North Rhine-Westphalia published this morning, profits from cryptocurrency transactions may soon be subject to income tax in Germany. This comes from a ruling that the Cologne Fiscal Court issued on Nov. 25, 2021.

In summary, the Fiscal Court has dismissed a complaint about a tax case on the subject of taxation of assets in the cryptocurrency market. However, as the ruling is on appeal to the Federal Fiscal Court, a final ruling is still pending. Once the BFH makes a final decision, this could soon provide the first precedent on the tax situation of cryptocurrency transactions.

The case itself involves various transactions in the cryptocurrency market: the plaintiff, who is not known by name, acquired a profit of around €3.4 million via various exchange and sale transactions between Bitcoin, Ethereum and Monero in 2017. For this purpose, the plaintiff used several digital trading platforms through which he concluded various purchase and exchange contracts in order to cleverly increase the value of his own crypto assets.

Subsequently, the tax office imposed a corresponding income tax on these profits, which were declared as income from private sales transactions. However, the plaintiff argued that these gains were non-taxable capital gains from cryptocurrencies and that there was a “structural enforcement deficit” (not least due to the anonymity in the crypto business) which makes it possible to reject gaining taxes and thus he appealed against the decision.

By way of explanation: Taxation of crypto profits would, in addition to citing the structural enforcement deficit, also violate the so-called “principle of determination”, as cryptocurrencies are not classified as such beyond doubt. According to the German tax rules, cryptocurrencies would lack the necessary disposal of the basis of a defined "economic value". Consequently, the profits would not be taxable in Germany.

The Cologne Fiscal Court did not follow this reasoning and dismissed the claim. Furthermore, the judges came to the conclusion that the standard requirements of a private sale transaction would be fulfilled after all. Accordingly, cryptocurrencies were qualified by the court as "other economic values" (within the meaning of § 23 Section 1 No. 2 German Income Tax Act) and thus do not violate the principle of determination. This is always applicable in Germany if there were ambiguities about the legal sequence or the subject matter of the economic values.

However, according to the court, the crypto assets traded by the plaintiff (Bitcoin, Ethereum and Monero) are marketable and independently accessible by the plaintiff, as they are structurally comparable to, for example, foreign currencies. As a result, the transactions are based on a certain valuability and, consequently, profits can also be taxed.

This decision is not yet legally binding. An appeal proceedings are pending at the Federal Fiscal Court under the file number IX R 3/22, so the final decision may still change. Depending on the further decision, it may be a first precedent.

The complete decision can be followed under this link: 14 K 1178/20

The article can be read at this link