A plaintiff was shipwrecked before the Federal Fiscal Court. He was apparently too impatient when trading Bitcoin, which is why he now has to pay massive taxes.

Capital gains from cryptocurrency transactions are taxable. Crypto investors must declare these gains on their income tax returns under the rules for income from private sale transactions. This was decided by the Federal Fiscal Court (BFH) in a fundamental judgment on the tax registration of virtual currencies.

Cryptocurrencies are economic goods that are subject to income tax liability for private sales transactions when purchased and sold within one year, the BFH announced on Tuesday in Munich. If investors hold the currencies longer, the profits are tax-free, unlike with shares.

Around 15 years after the introduction of bitcoin, the highest German finance court commented on tax issues relating to crypto transactions for the first time. The plaintiff was a private crypto investor from Cologne who had acquired, exchanged and sold various crypto assets. In order to process transactions with Bitcoins, Ethereum and Monero, the private individual had concluded purchase contracts with providers of crypto assets at current prices via digital trading platforms. In some cases, he had also agreed exchange transactions with cryptocurrencies from his portfolio. In his income tax return for 2017, the plaintiff stated a crypto profit of around 3.4 million euros.

Investor did not consider “data set” to be a taxable asset

A dispute arose with the tax office as to whether this profit was subject to income tax. The plaintiff argued that a crypto win is a record and therefore cannot be qualified as an “commercial asset” subject to income tax. In addition, taxation is opposed by a structural deficit in enforcement: the state can practically only tax profits from crypto transactions if a taxpayer expressly states that they have invested in crypto assets. As a result, only the honest pay taxes on successful crypto transactions. Such a “dumb tax” is unconstitutional.

The Cologne Finance Court did not follow the plaintiff’s arguments and dismissed the lawsuit in 2021. Lawsuits against the taxation of cryptocurrencies were also unsuccessful before the finance courts of Baden-Württemberg and Berlin-Brandenburg. The Nuremberg Finance Court, on the other hand, had expressed doubts as to whether profits from speculative transactions with virtual currencies were subject to income tax.

The BFH has now decided that crypto profits are “other economic goods” within the meaning of income tax law. “The concept of economic good is to be interpreted broadly,” said the court. This also included “concrete opportunities and advantages that a taxpayer can afford to obtain and which, according to the public’s opinion, are accessible to a separate independent assessment.”

Market value makes taxation possible

This is the case with virtual currencies. From an economic point of view, Bitcoin, Ethereum and Monero are to be regarded as means of payment that are traded on platforms and exchanges. They would have a market value and could be used for payment transactions between the parties involved. The BFH thus supports the legal opinion of the Federal Government, which the Federal Ministry of Finance presented in May 2022 in a guide on the income tax treatment of bitcoins and other crypto assets.

Regarding the plaintiff’s objection that only honest people pay taxes on crypto profits, the BFH stated that there was no structural deficit in enforcement. There are neither collection rules that stand in the way of taxation, nor are there any indications that the tax authorities are not able to record profits and losses from transactions with cryptocurrencies. The BFH rated the procedures in which the investigative measures, such as requests for collective information, were unsuccessful as “individual cases” that did not justify a structural deficit in enforcement.

It is unclear to what extent the Treasury receives tax revenue from crypto transactions. A ministry spokesman told the F.A.Z. that statistical evidence is not possible because income on which income tax is payable is not usually assigned to individual assets. In addition, income tax is based on the total amount of income.

In view of the uncertainties about the tax issues in connection with cryptocurrencies, specifications for the fulfillment of the tax return obligations as well as the recording and cooperation obligations for the recording of cryptocurrencies are currently being developed with the participation of the associations. Even getting reliable information about the available cryptocurrencies is difficult. A figure of around 20,000 is mentioned, but there are almost daily fluctuations due to the extreme volatility of the crypto market.