Crypto currencies – treatment with respect to income tax and VAT

DELTA Revision

The Federal Government has commented on the question how the mining and the application of crypto currency units generated by mining (e.g. Bitcoin) are treated with respect to income tax and VAT. Furthermore, the Government has given its opinion on how the purchase and sale or exchange of crypto currency units and digital tokens into other crypto currency units and digital tokens are treated regarding income tax and VAT. For this purpose Dr. Michael Meister, parliamentary secretary of state, has explained as follows:

  • If mining is an occasional activity, it might be treated as income from other services according to § 22 no. 3 EStG (German Income Tax Act) which is only subject to income tax for amounts exceeding 256 EUR per calendar year.
  • The exchange or re-exchange of crypto currency into Euro or another crypto currency within one year after the acquisition will lead to a private disposal transaction according to § 23 section 1 set 1 no. 2 EStG (German Income Tax Act).
  • If crypto currencies are acquired or produced for the purposes of a professional activity with the intension of making a profit, profits from disposal transactions or exchange of the crypto currency are recorded as income from trade business. The mining costs of the crypto currency are deductible as business expenses.
  • The European Court of Justice (EuGH) clarified the VAT treatment of the exchange from Bitcoin into conventional currency in its ruling on October 22, 2015 (C-264/14, Hedqvist the treatment). Accordingly the exchange of conventional (legal) currencies into units of the virtual currency called “Bitcoin” and vice versa is regarded as a tax exempt service according to article 135 section 1 letter e Directive on the VAT (MwStSystRL ).
  • The use of Bitcoin is compared with the use of conventional payment instruments provided that it has no other function than being a pure payment instrument. Therefore, the exchange of Bitcoin for a simple payment is not taxable.
  • The treatment of mining with respect to VAT has not been finally clarified yet. The European Commission has already initiated discussions in the VAT committee, but they are not finalized yet.

The Federal Financial Supervisory Authority (BaFin) currently reviews regulatory requirements for action.