Tax treatment of Bitcoin

In response to a written request from the Bundestag, Federal Government commented sales and income tax aspects of transactions with cryptocurrencies.

Background: Member of parliament Lisa Paus wanted to know how mining and use of mining-derived crypto currency units are treated in terms of sales and income tax. Government should comment sales and income tax treatment of buying and selling or exchanging crypto currency units.

Tax income treatment

If cryptocurrencies are acquired or produced as part of a profit-making commercial activity, profits from the sale or exchange of the cryptocurrency will be recognized as income from business enterprise. The cost of mining cryptocurrencies is deductible as operating expenses.

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VAT treatment

VAT treatment of the exchange of Bitcoin into a conventional currency has the ECJ with its decision v. 22.10.2015 in the case Hedqvist (C-264/14, Haufe index 8636784) clarified.

According to this, the exchange of conventional (legal) currencies in units of the virtual currency “Bitcoin” and vice versa is a service for consideration that falls under the exemption under Art. 135 (1) (e) of the VAT Directive. The use of Bitcoin is equated to the use of conventional means of payment , provided that they serve no purpose other than a pure means of payment. The dedication of Bitcoin to the mere payment of fees is therefore not taxable .

VAT treatment of the mining has not been finally clarified yet. European Commission already initiated discussions in the VAT Committee, but these are still ongoing.

Note: BaFin is currently reviewing regulatory trading needs

Answering a further question, State Secretary also commented on possible regulatory need for action with regard to cryptocurrencies. According to this, Federal Financial Supervisory Authority (BaFin) qualified Bitcoins as financial instruments under German Banking Act. As a result, exchange platforms for virtual currencies are generally subject to BaFin supervision.

At European level, amendment to the Fourth Money Laundering Directive seeks to oblige all European virtual currency exchange platforms and electronic wallet providers to comply with anti-trust due diligence, including identifying their customers and reporting suspicious facts, whether or not subject to financial supervision. As a result, the anonymity by an identity requirement when exchanging virtual currency in real currencies should be eliminated. With the involvement of BaFin, it is currently being examined what regulatory trading needs.

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