Almost a year after the initial draft of the Federal Ministry of Finance (Bundesministerium für Finanzen or BMF), the BMF has now published its final letter on the tax treatment of cryptocurrencies.
As can already be seen on the second page of the final letter, the BMF states that for regulatory purposes the terms “cryptocurrency” and “crypto-securities” should be used for tokens. However, this should not give the impression that the regulatory classification is relevant for tax treatment.
The BMF has refined the definitions and is interested in understanding the technical basics. In particular, the BMF responds to the criticisms on the opinions given on the project regarding “proof of stake” and “staking” by providing detailed definitions. It distinguishes between “validated staking” (or forging) and “delegated staking”.
Fortunately, the BMF has also acknowledged that the “wallet” is not the unit wallet of a virtual currency and tokens, but rather contains a combination of “private key” and “public address”.
Asset value also visible without tax declaration
We have already discussed under the Crypto-Asset Reporting Framework (CARF) that with the knowledge of the “public address”, the BMF will be able to track the current value of assets in the future. Knowledge of the existence of “block explorers” was stated in the letter.
At the same time, however, the letter also explains that the visible addition or disposal of units of a virtual currency and tokens does not necessarily have to coincide with the dates of acquisition or disposal relevant for the purposes of the income tax.
Units of a virtual currency and tokens are assets
The BMF reiterated its view that virtual currency units and tokens are assets. The tax administration therefore complies with the case law of the tax jurisdictions.
In accordance with the constant case law of the German Federal Financial Court, the term “patrimony” must be interpreted in a broad sense. In addition to ownership and rights, it also includes actual conditions and concrete possibilities (ie all pecuniary benefits which cost the taxpayer to obtain and which are amenable to independent assessment). An independent appraisal means that a purchaser across the business would see tangible value in the benefit to which they would apply significant special consideration in the context of the total price.
According to the BMF, virtual currency units and tokens make it possible to assign the asset-based benefits of one’s own public key to another public key. Based on their market price, which can be determined regularly via stock exchanges and trading platforms and lists, they are accessible for independent valuation.
Assignment to owner
Presumably, the IV C 1 department of the BMF has carefully studied the comments of the tax court in Cologne regarding the contradiction with the tax distribution (§ 39 of the German tax code (AO)). Without giving more details on the civil law owner, the letter specifies that the beneficial owner is the one who can initiate transactions and therefore “dispose” of the allocation of units of a virtual currency or other tokens to keys. public. This is normally the owner of the private key.
Mining and validated staking are acquisition processes
Mining and validated staking are acquisition processes, but not necessarily commercial ones. Instead, the BMF recognizes that the respective activity can also be attributed as subordinate to private wealth management. However, the BMF assumes primarily a commercial activity, since “rewards” and “fees” are paid to the creator in exchange for the creation of new blocks. However, the explicit rebuttal of the presumption of commercial or business activities, which was still in the draft, is missing in the final declaration. Therefore, the general principles are likely to apply.
Unlike the first three, it is now the price of a “stock exchange” or an online list that will suffice for the initial measurement of the assets of the company, provided that no stock market price is available.
Pool or Platform Staking
Participation in a staking pool (different from a mining pool) or rig staking generates other income (§ 22 (3) German income tax law (ESTG)). The BMF speaks here of “delegated staking” (i.e. people make units of a virtual currency available for staking without themselves being involved as “validators” in the creation of the block ). Acquired units of a virtual currency must be accounted for at the market rate at the time of acquisition.
No extension of the detention period
The extension of the detention period to ten years was one of the main criticisms of the opinions given on the project. The BMF has recognized the benefits for Germany as a crypto location and does not explicitly enforce regulations on the extension of private assets.
Important change for the tokens used
The draft letter stipulated with respect to the valuation of non-monetary benefits in connection with the distribution of tokens to employees that the non-monetary benefit should be valued in accordance with the general provisions – at the final price at the place of distribution reduced by the customary price discounts at the time the right was granted (§ 8 (2) sentence 1 German Income Tax Act (ESTG)). This mention or the link with the granting of the right could be understood as meaning that if the right is granted early, the employee could benefit from a price which may still be favorable at this stage, and the benefit of compensation pecuniary value can therefore be kept low, even if the tokens only accumulate at a later time. This would correspond to guideline 8.2. para. 2 p. 7 Wage Tax Guidelines (LStR), according to which, in the event of benefits in kind and diverging order and delivery dates, the circumstances at the date of the order should be decisive in determining the price of the offer.
However, it had already become clear during the consultation process for the draft letter that the BMF does not actually see this design option. The last letter now clarifies this insofar as it is the timing of the regularization that should be decisive for the assessment. The BMF does not specify how this is consistent with Guideline 8.2. para. 2 p. 7 Wage Tax Guidelines (LStR).
Additional letters planned
During the 1st Blockchain Roundtable, in which CMS Hasche Sigle also participated, the BMF has already made it known that it intends to supplement these letters with additional letters in due course. The BMF has removed the placeholder for cooperation and registration obligations and – according to Möhlenbrock – already plans to coordinate with the federal/state working group for the first supplementary letter in the summer of 2022. There will be also a supplementary letter on the income tax treatment of “decentralized finance” and “non-fungible tokens”.
No Protection of legitimate expectations
The principles of the letter must be applied to all open cases. Taxpayers who have not yet prepared their tax return should, in consultation with their tax advisor, review the contents of this letter when preparing their tax return and explicitly explain any differing views. If tax returns have already been filed and income tax notices have been announced, they can be kept open through appeal. In any case, this is necessary in the context of the ongoing action before the German Federal Tax Court regarding the taxation of the trade as a private sale transaction.