QUESTIONS & ANSWERS

In general, token-related activities can generate income from all types of income. The actual allocation ultimately depends on the circumstances of the individual case. For companies, income from commercial activities is particularly relevant. The taxation of tokens depends on whether the related activity is commercial or private asset management.If the income from trading in tokens is earned in the course of a commercial activity, the crypto profits must be taxed in the course of the trade. Unlike private investors, commercial persons or companies do not engage in private sales. This means that profits are taxable as operating income in the context of trade. Such income and sales gains in the operating sector are always operating income and have a general effect on income, business and corporation tax. In addition to the income tax consequences, the VAT consequences are crucial for companies. The European Court of Justice (ECJ) has confirmed in the Hedqvist judgment (judgment of 22. 10. 2015, C-264/14) that the commercial conversion of Bitcoin into conventional currencies is not subject to VAT. In the absence of a decision by a German financial court, the ECJ decision is therefore decisive. However, if you would like to check the specific issue of VAT liability, please contact us.

In general, staking can be defined as part of a process that certain tokens use to verify certain transactions. The mechanism can be described as proof-of-stake. This means that people who already have a stake in a blockchain can add additional transaction blocks to that blockchain. So crypto holders consciously use their existing token to continue the blockchain. The tokens are locked, but not transferred. In the case of proof-of-stake blockchains, the actual process that was previously referred to as “mining” is now referred to as “forging”. So, the idea of proof-of-stake is that the blockers (forgers) use their own tokens as a stake. Participation in such a process takes place via so-called staking pools. The special thing about such pools is that they have a higher probability of being selected as the next forger. In the BMF letter staking is described as the provision of a stake without taking over the block creation. Staking is about providing a stake without being involved as a forger in the block. At the same time, staking offers the opportunity to receive additional income (rewards) by depositing tokens as a reward for supporting the network.

The increasing importance of blockchain technology is already evident in the fact that it can contribute to the standardisation and/or automation of indirect taxation. So, it is not surprising that blockchain technology is increasingly reflected in the debate about the development of the tax system.The underlying Distributed Ledger technology is a decentralized database, so that data exchange between the database participants takes place on the basis of a so-called “peer-to-peer network architecture”. In the blockchain, as already described in the previous answers, the data sets are combined into blocks, which are then linked together to form a chain. It is important to note that it depends on the specific legal form. It should be noted that the association of at least two natural or legal persons for the promotion of a common purpose constitutes civil law association (in German: GbR). So, depending on the legal form, income tax is payable (in the case of a GbR).However, the BMF letter of 10.05.2022 does not address the specific issue of taxation. Consumption taxes with a broad tax base, such as sales, consumption and energy taxes, are relevant for blockchain technology. Due to the large number of complex transactions, the question of which taxes depends on the individual case. In view of the tax challenges of a blockchain structure, please feel free to contact us if you have any questions.

If units of a virtual currency are to be classified as current assets, they shall be activated as intangible assets in the tax and trade balance. This means that tokens are in principle to be allocated to current assets, so they must necessarily be activated for tax purposes. It is important to distinguish for what purpose units of a virtual currency were purchased. The BMF (Bundesfinanzministerium = Federal Ministry of Finance) assumes that tokens acquired for long-term retention in the company are to be recorded in fixed assets under financial assets in accordance with the regulations of the German Commercial Code (HGB). The allocation ultimately depends on whether the token is intended to be used permanently (fixed assets) or to be sold in a short period of time (current assets). Therefore, the token should be recognised in the balance sheet either as other assets (current assets) or as a financial investment (fixed assets).

When determining profits a cash-based accounting, the access of units of a virtual currency in the context of an exchange-like transaction results in operating income. The acquisition costs incurred when purchasing tokens can be considered as immediately deductible operating expenses. The sale generates operating income in the amount of the sale proceeds. If an individual consideration is not possible, the Bundesfinanzhof argues that, for the purposes of the holding period, the units of a virtual currency purchased first are deemed to have been disposed of. Based on the first-in-first-out method (FiFo method), for the purposes of valuation, it can be assumed that the first tokens purchased were sold first. Important here: After a complete sale of the token and subsequent re-purchase of the same or other token, the method can be changed.

Basically: The importance of tokens for companies is increasing. Therefore, companies that use and work with tokens must pay particular attention to tax consequences. If your company is categorized as a business enterprise and the token is purchased with funds for companies, these should always be recorded as part of business assets. Depending on the speculation of the holding period, these are to be classified as fixed or current assets. Depending on whether the tokens are held in fixed or current assets, there are differences in the subsequent valuation.

Tokens are not defined as payments in a classical sense, but rather a currency-like unit created by mining. Even if, for example, the cryptocurrency Bitcoin is highly liquid, tokens are not shown in the balance sheet under the item cash or balances with credit institutions.As a rule, tokens are regarded as intangible assets. This view was fundamentally confirmed by the Bundesfinanzhof (highest German finance court) in its judgment of 14 February 2023. Accordingly, tokens are classified as ‘other economic good’ according to the provisions of the German Income Tax Act. In its letter of 10 May 2022, the Federal Ministry of Finance (BMF) does not answer the question whether the income tax treatment of tokens is a tangible or intangible asset. But according to the prevailing opinion, token are non-wearable economic assets. The BMF also considers that virtual currency units are allocated to fixed assets (financial assets) or current assets (other assets) in accordance with balance sheet tax principles.

Due to the high volatility of individual tokens, it is possible that companies may incur losses. Losses are deductible as operating expenses. This means that units of a virtual currency can be compared with securities whose acquisition costs are deducted as operating expenses only at the time of withdrawal. It is important that losses are only offset against taxable profits. If the currency is lost or hacked, it is considered a loss equal to the purchase costs. In this context, it should be noted that when purchasing a virtual currency, fixed assets are subject to a reduced threshold and current assets are subject to a strict threshold. This means that fixed assets are not subject to scheduled depreciation due to their indefinite useful life. Therefore, with regard to the valuation scale, the stock exchange price at the cut-off date is relevant. So if companies write off crypto stocks unscheduled, they may be able to claim a price loss for tax purposes. This means that companies are, in principle, fully offset operating losses resulting from the sale or depreciation of crypto assets.

If units of a virtual currency are operating assets, the sales proceeds are necessarily operating income. Even if the receipt of units of a virtual currency is operationally motivated, operating income is existent. It is also important that the individual acquisition costs of the sold tokens have to be deducted when calculating the profit on sale. If the individual acquisition costs cannot be determined or assigned individually, they may be valued with the average acquisition costs. It is important to note here that there is no one-year speculative period for disposals of operating assets.

If units of a virtual currency (e. g. Bitcoin) are repeatedly bought, sold or exchanged, such trading may constitute a commercial activity. Regarding the distinction between private asset management and commercial activity, the criteria for commercial securities and foreign exchange trading are relevant. We are at your disposal for an individual examination of your individual case.

Mining is a process in which computing power is made available for transaction processing  (i. e. blocking). A mining pool can thus be defined as a kind of decentralized Bitcoin data center where miners pool their computing power to jointly validate transaction blocks. The aim of such a mining pool is to verify the correctness of the transactions, thereby bundling the verified transactions and writing them in a block. These are linked together in the blockchain in order to be able to read the transaction sequence. The concrete significance of blockchain technology for tax authorities and businesses is discussed in detail in question 11. From a tax point of view, the following points must be taken into account:1. If the income from the block creation cannot already be classified as such from a commercial enterprise by virtue of its legal form, the classification as a commercial activity depends on whether the requirements for a commercial enterprise are fulfilled.2. The block creation must be suitable for making a profit from this activity in the long term.3. The block creation is permanent if it is set to repetition.It is important that the block creation does not constitute private asset management. In both mining and forging, blockers receive block rewards and transaction fees in exchange for creating new blocks.Depending on the contractual arrangement, there may be co-entrepreneurship at the level of the mining pool in the individual case. The general principles governing the acceptance of co-entrepreneurship shall apply. In any case, co-entrepreneurship does not exist if the operators of the mining pool are only provided with computing power for remuneration by individual miners as part of a service relationship. A staking-pool does not normally constitute co-entrepreneurship.

If units of a virtual currency (e. g. Bitcoin) are repeatedly bought, sold or exchanged, such trading may constitute a commercial activity. Regarding the distinction between private asset management and commercial activity, the criteria for commercial securities and foreign exchange trading are relevant. We are at your disposal for an individual examination of your individual case.

A token can be fungible (=exchangeable) on the one hand, and non-fungible (=not exchangeable) on the other. Non-exchangeable means that it is a unique digital asset that cannot be exchanged for another asset on a one-to-one basis. NFTs are among the other assets and are characterized by their uniqueness (=non fungible). While, for example, Bitcoin can be exchanged as often as possible and tokens are therefore not unique (=fungible), digital assets such as digital works of art or possessions cannot be exchanged one-to-one and therefore represent NFTs.The BMF letter of 10.05.2022 does not address NFTs because the tax classification of NFTs is largely unclear. For companies, the following may be relevant from a tax perspective: If mining is classified as commercial, the sales proceeds represent taxable operating income, which may be reduced by acquisition or disposal costs. In this case, VAT is payable at the time of the sale or with the invoice. Profits from the sale of tokens are subject to income tax and business tax. Tax-free disposal is not possible in the business sphere. In addition, solidarity surcharge and church tax may apply.