Seeing how many people are trying to find the right place for themselves and their cryptocurrencies, we can notice problems related to incomplete regulation of this market. Today, governments are out to take control, or at least oversee the cryptocurrency market. Progressive work on regulations in this area can be expected. An increasing number of European countries take a decision to tackle this issue. So, what does the taxation of cryptocurrencies in Germany look like compared to what we know from our system?
TAXATION OF CRYPTOCURRENCIES IN POLAND
In Poland, the rules for the taxation of cryptocurrencies are fairly uniform. The income from the sale of cryptocurrencies, and therefore its conversion to FIAT money, is subject to taxation. This can also be done by paying for goods or services. This income will always be taxable – just like capital gains – so with 19% income tax. It is not directly important for the fiscal authorities either how we came into possession of cryptocurrencies, whether it was acquisition of cryptocurrencies on the stock exchange, mining or airdrop. All this matters only in the context of whether there will be costs reducing the revenue from the sale of cryptocurrencies.
So, in other words, currently in Poland it looks like this:
- We define the revenue from the disposal of cryptocurrencies against payment as:
- cryptocurrency value converted to PLN, in the case of exchange of virtual currency into FIAT currency, or
- the value in PLN of the service or goods that we purchased making the payment in cryptocurrency.
- From the value of this revenue, we can subtract the tax-deductible cost, which will amount to:
- the sum we paid for the cryptocurrency (i.e., how much we paid for a given unit in FIAT currency),
- the value of the service or goods for which we received cryptocurrency or
- “0” for mining.
The latter element is the most controversial one in the Polish tax system. Due to the fact that the cryptocurrency profit is treated as capital profit in our country, it can only be reduced by the cost of acquiring crypto, and not its generation. Hence, at least according to current practice and regulations, mining costs (including equipment, energy, etc.) remain neutral for tax purposes
HOW IS IT DONE IN GERMANY WITH REGARD TO THE TAXATION OF CRYPTOCURRENCIES?
Our western neighbours have decided to explore the subject of cryptocurrencies a little further. In 2022, the German fiscal authorities issued a document analogous to our tax explanations, in which they explained the rules of cryptocurrency taxation. A distinction was made between trading cryptocurrencies and obtaining them (e.g., mining). Both operations were classified as a different source of income.
The source to which the income from a particular cryptocurrency transaction will be classified depends on its nature and frequency. In Germany, similarly as in Switzerland, the determination of whether operations are related to economic activity or private property is crucial for determining the tax consequences of cryptocurrency transactions.
In other words, the tax system in Germany, unlike in Poland, allows for the recognition of mining as a transaction taxed as an economic activity. Consequently, the associated costs, which are an important part of the expenditure on acquiring each unit as part of mining, may reduce the tax on cryptocurrencies.
Consequently, in each case it should be considered whether the sale of cryptocurrencies takes place as part of:
- Mining (then we tax it as a regular business activity)
- Trading (just as above: economic activity)
- Occasional currency trading (private sale) – here you will be able to benefit from the tax-free amount referred to below
The rate we apply in each case depends on additional factors (for example, in which German federal state we are). However, importantly, the first point allows for recognising the costs of cryptocurrency production as operating costs.
Importantly, in Germany, any exchange of cryptocurrency for FIAT currency (euro, USD), goods, services, but also (unlike in Poland) exchange for another cryptocurrency or token (sic!) is considered to be a sale.
In order to be able to estimate whether and how much income was generated in connection with the transaction, it is necessary to determine the price obtained for the virtual currency being sold. As long as exchanging cryptocurrencies for FIAT does not cause us problems in this respect, the valuation of another token, goods or service may be a bit more troublesome.
When will your cryptocurrencies be tax exempt in Germany?
In addition, if more than one year has elapsed between the purchase and sale of virtual currencies, the income thus obtained is not subject to taxation in Germany. If the sale of the virtual currency takes place within one year of its acquisition, the taxpayer has the right to apply the tax-free amount. It amounts to 600 euros in a tax year for all private sales transactions (i.e., it concerns not only cryptocurrencies but other components of private estate). Even if this sum is exceeded by a minimal amount, it becomes necessary to pay the tax on the whole sum.
How do you settle tax for an Airdrop?
Receiving a virtual currency as a result of the so-called airdrop is also a taxable operation. If receiving a token as a result of an airdrop involves activity on the part of the user (e.g., posting information about the airdrop), the market value of the token obtained as a result of the airdrop, depending on the nature, will constitute either revenue from business activity or revenue from the provision of services.
Sometimes such tokens have initially no value at the time of the airdrop. In this case, the revenue will not be generated, but at the same time, at the time of selling the token (revenue will be generated from it), there will exist no cost which is usable for reducing the tax base.
When tokens are allocated “free of charge” without undertaking action on the part of the user, an issue of a gift comes into play, which should be considered from the perspective of donation tax regulations.
Can cryptocurrencies constitute an income from work?
When a person receives tokens from an employer, they constitute income from the employment relation. Each time it is necessary to examine whether the cryptocurrencies received are of a cash or non-monetary nature. This affects both the determination of the value of these benefits and their taxable value. In the case of benefits in kind, there is an exemption from taxation of up to EUR 50 a month
Cryptocurrencies as capital gains
In Germany, as in Poland, certain types of cryptocurrencies meet the definition of securities, which results in their qualification as a source of income from monetary capital. In Poland, this does not matter as much, as a 19% tax rate applies to all these revenues (but the manner of recognition in the declaration slightly differs). In Germany, however, this different qualification has a real impact on the tax rate applied, and caution should therefore be exercised.
WHAT ARE THE REVENUES FROM CRYPTOCURRENCY MINING LIKE IN POLAND AND GERMANY?
Mining cryptocurrencies in Poland
In Poland, obtaining cryptocurrencies alone, as a result of proof of work or proof of stake, is not subject to taxation. Only the exit to FIAT is taxed, and since it is not possible to recognise the costs associated with the acquisition of such cryptocurrencies, the sales revenue is de facto taxed.
Mining cryptocurrencies in Germany
In Germany, it is already the receipt of an award for mining or staking that is subject to taxation. The activity of mining or staking bears the characteristics of service provision operations, so that if it is provided in an organized and continuous manner, the profits from such an operation should be classified as income from an economic activity. In the absence of this continuity, the income it brings should be taxed as other incomes from services.
In the opinion of the German authorities, mining is, in principle, of a commercial nature and should therefore constitute income from economic operations with the right to identify the costs associated with the pursuit of those activities.
In the case of staking, the matter is additionally more complicated, because we can distinguish two types of operations:
- when the user is actively involved in the creation of a unit, a commercial character is attributed to such an activity.
- in the second type of operation called cold staking by the authorities (where the user’s participation boils down only to keeping the cryptocurrency in the wallet, without active participation in the creation of the unit), we deal rather with the management of private assets.
Taxation should take place from the source of income from other services and if such income, together with other incomes from services, does not exceed EUR 256 per year, it is not subject to taxation.
Regular traders who trade cryptocurrencies as part of their business may not benefit from the German system. In the case of people who store cryptocurrencies for a long time, the situation may look completely different. Similarly, in the case of miners who in Poland, de facto, pay tax on the income from the sale of mined cryptocurrencies without the right to settle the costs of excavators or electricity. In Germany, they account separately for the income from “mining” (with the right to account for documented expenditure on excavators) and separately for the income from sales, where the cost of acquisition is the income from mining.
In the cryptocurrency industry, apart from tax regulations, the technology and your awareness that you operate in a market that gravitates towards regulation are also important. Remember. The dynamics of cryptocurrency technology has allowed us to attain strong development, but electronic solutions that facilitate tax settlements struggle to keep up. The tax offices also keep learning. So, consider it straight away how you will set up your processes, technologies that will allow you to facilitate the preparation of your tax return.
The German system of taxation for cryptocurrencies consists in assigning a fiscal meaning to each event, qualifying it properly and paying the tax on cryptocurrencies. Sometimes it may pose considerable difficulty, especially when there are a lot of transactions. Therefore, it is not surprising that regular trading, operations as part of mining or proof of stake are viewed as having features of business activity and settlements are made in a professional manner.
For natural persons conducting cryptocurrency transactions as part of managing private property, there are calculators which, based on the statements from the cryptocurrency portfolio, calculate the amount of tax on their own and submitting a tax return is much easier. Many markets seek to regulate cryptocurrency transactions. And in the countries where this turnover is unregulated, it should not be taken for granted that cryptocurrencies are not or will not be taxable.