Cryptocurrencies: Final circular on taxation from the Federal Ministry of Finance

Anyone who takes a look at the crypto market these days will notice that the highs of the last few years have come to an abrupt end, and investors’ risk aversion is reflected not only in the stock markets, but also in the crypto markets. For German investors in cryptocurrencies, planning security and a small sigh of relief are now possible, at least from a tax perspective:

The Federal Ministry of Finance published the long-awaited circular entitled Individual Questions on the Income Tax Treatment of Virtual Currencies and Other Tokens on 10 May 2022 (ref. IV C 1 - S 2256/19/10003 :001). In its final version of the circular, the Ministry has moved away from the ten-year holding period in section 23 (1) sentence 1 no. 2 sentence 4 German Income Tax Act for the tax-free disposal of cryptocurrencies from private assets. It is expressly stated that an extension of the holding period from one to ten years for cryptocurrencies is no longer intended, even if they are used as a source of income through lending (crypto-based loan) or staking (provision of units of a cryptocurrency to secure the network and transactions) and income has been generated from that.

This development is very pleasing for cryptocurrency investors, as cryptocurrencies, even if they have been used for lending or staking, can thus continue to be sold tax-free after the expiry of a one-year holding period of section 23 (1) sentence 1 no. 2 German Income Tax Act.

In addition to helpful definitions of the technical terms of the crypto world, the Ministry’s circular contains further interesting tax statements:

• Cryptocurrencies are always (non-depreciable) assets within the meaning of the German Income Tax Act.
  
  
• Units of cryptocurrency received due to mining, forging, hard forks, airdrops, lending and staking lead to acquisition transactions in private or business assets. The acquisition transactions are valued based on the market price of the cryptocurrency at the time of acquisition, addition or inflow (depending on the transaction).
  
  
• Activities such as mining and forging as well as trading in cryptocurrencies can result in income from commercial operations, e.g. if the activity is carried out on a long-term basis and with the intention of making a profit. As far as trading in cryptocurrencies is concerned, the income tax criteria for commercial securities and foreign exchange trading can be used to distinguish it from private asset management.
  
  
• If there is no commercial income, the activities are classified as other income according to section 22 no. 3 German Income Tax Act, but are only taxable if they exceed EUR 256 in a calendar year. That applies in particular to lending and staking; in the case of airdrops, however, only if there is consideration in return.
  
  
• Disposals of cryptocurrencies from among private assets (regardless of how they were acquired) are taxable under section 22 no. 2 in conjunction with section 23 (1) sentence 1 no. 2 German Income Tax Act if the period between acquisition and sale does not exceed one year and the total profit from private sales transactions exceeds EUR 600 per calendar year. Any exchange of a cryptocurrency (including ICOs) also leads to a disposal transaction. For cryptocurrency newly acquired through the exchange, a new holding period begins at the same time.