Taxation of the Bitcoin investment

Cryptocurrencies (e.g. investments in bitcoins) are increasingly establishing themselves as an independent asset class. The first financial derivative (future) on Bitcoin was traded on a US stock exchange on 11 December 2017. Accordingly, for a short time now Financial products which replicate the performance of cryptocurrencies and thus enable investors to participate in the performance of this form of investment by simply buying securities via the stock exchange without having to invest directly in bitcoins via the relevant trading platforms (e.g. www.bitcoin.de) with the corresponding account opening there. This opens up indirect investment in cryptocurrencies to a broader group of investors, which will certainly further increase the attractiveness of this asset class.

But how are investments in cryptocurrencies taxed? Depending on the form of investment, a distinction must be made between direct and indirect investments. Taking the example of an investment in bitcoins, the taxation of German private investors is as follows:

• Direct investment in bitcoinsIf you want to buy real bitcoins, you need an electronic wallet. This wallet can be used to receive bitcoins and make transfers. From a tax perspective, bitcoins are classified as ordinary intangible assets or as so-called foreign currency amounts within the meaning of sec. § Section 23 para. 1 no. 2 sentence 3 EStG (see ECJ of 22 October 2015, C-264/14 on the VAT Directive). Sales transactions with bitcoins are therefore only taxable as so-called private sales transactions pursuant to Section 23 para. 1 no. 2 EStG if they do not exceed the limits of a commercial trading transaction (Section 15 EStG). This is only the case if there is a period of no more than one year between the purchase and sale of the bitcoins. Disposal is, for example, the sale/exchange of Bitcoins for USD/Euro via a trading platform, but also the use of Bitcoins as a means of payment, i.e. when the Bitcoin holder pays for the purchase of goods or services with Bitcoins. The disposal proceeds therefore result from (i) the performance of the Bitcoin and (ii) the performance of the exchanged currency. When determining the time of acquisition, the identification of the bitcoins sold is of central importance. If all bitcoins are held in a wallet, we believe that the FIFO (first-in-first-out) consumption sequence method can be applied by analogous application of Section 23 (1) no. 2 sentence 3 EStG for reasons of simplification, firstly when determining the time of acquisition (and thus whether the relevant one-year period has expired), but also when determining the capital gain. If there is no more than one year between the sale and purchase, the capital gain is taxable at the progressive income tax rate (up to 47.48%) without favourable treatment. If the one-year holding period has expired, Bitcoin sales transactions are completely tax-free.
• DerivativesIf the investor invests in derivatives (e.g. calls/puts, CFDs) that are linked to the performance of bitcoins and provide the investor with a cash settlement of the difference, the investor earns income from forward transactions in accordance with Section 20 (2) 3 EStG, which is subject to the flat tax rate of 26.375%.
• Securities / CertificatesSecurities/certificates for which the redemption amount depends on the performance of the bitcoins and which promise or pay the investor a redemption in cash on maturity (cf. e.g. the open-end certificate of Bank Vontobel), but may also be fully cancelled depending on the Bitcoin price ("full-risk certificates") are to be classified as other capital claims in accordance with Section 20 (1) no. 7 EStG. Income from the redemption/repayment of such securities is also subject to the final withholding tax rate of 26.375% for the investor.
• Securities with entitlement to delivery in kindIf the financial instrument linked to the performance of bitcoins securitises a claim to delivery in kind, whereby the investor has an (exclusive) claim to physical delivery of bitcoins (transfer of real bitcoins to his electronic wallet) instead of repayment in cash, then in our opinion the highest court case law on XETRA gold (BFH of 12 May 2015 VIII R 35/14 and VIII R 4/15, cf.In our opinion, the supreme court case law on XETRA gold (BFH of 12 May 2015, VIII R 35/14 and VIII R 4/15, cf. also Thuringia tax court of 27 June 2017, 2 K 60/16, on Gold Bullion Securities; for details cf. StieglerNWB E+V, issue 9/2015, p. 311) can be transferred to Bitcoin investments. As a result of the claim to delivery in kind, the investor is treated as if he were investing directly in the bitcoins. Income from such financial instruments is therefore also tax-free outside the one-year period under Section 23 EStG.
• Funds / ETFsIt won't be long before the first funds that track the performance of bitcoins come onto the market. Such investments are regulated under the special legal provisions of the new InvStG Distributions from the fund, gains from the sale of fund units and also an annual retention tax (so-called advance lump sum) are subject to flat-rate withholding tax of 26.375% for private investors (without application of Partial exemptions).

The original acquisition of bitcoins through the so-called "Mining of bitcoins. The miner provides various services in the Bitcoin network (transaction confirmation, provision of computer capacity, etc.). The miner receives bitcoins in return. The bitcoins acquired in this way are subject to income tax as commercial income for the miner in accordance with Section 15 EStG at the progressive tax rate and - if a tax-free amount of EUR 24,500 is exceeded - are also subject to trade tax.

Dr Thomas Elser and Tobias Stiegler are tax advisors at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.