Post Menu and Details.
- Taxation in Cryptocurrencies Trading
- How are cryptocurrencies considered for tax purposes?
- I am a private investor. When do I have to pay taxes for crypto trading?
- Where do I enter crypto trading in the tax return?
- What about entrepreneurs trading cryptocurrencies?
- How to calculate profit from crypto trading?
- What applies to crypto trading via CFDs and certificates?
- Can I also deduct wallet or broker costs from tax?
Reading time: ~4 minutes
The supporters of cryptocurrencies strive for a world where the monetary system runs free of state control.
Virtual currencies such as Bitcoin, Ethereum, or Binance Coin see themselves as a bulwark against the state money monopoly. But the reality is different: Anyone who trades in Bitcoins has to pay taxes.
Profits from trading with crypto money must be reported to the tax office as part of the tax return – otherwise, there is a risk of tax evasion.
Cryptocurrencies are not legal tender. The Federal Ministry of Finance classifies Bitcoin and approximately 16,000 digital currencies as private money. They are, therefore, legally a “different economic asset.” If investors sell their crypto shares privately, this transaction falls under private sales transactions, including exchanging them for other cryptocurrencies. For example, if investors want to exchange their bitcoins for Ripple coins, they must also note the exchange in their tax returns.
From a tax point of view, cryptocurrencies differ from shares: securities transactions are income from capital assets. The good thing for crypto investors is that since their asset is not counted as capital income, there is no withholding tax, at least not if you own physical coins.
First of all, it depends on the holding period. Cryptocurrencies have a one-year speculation period, which means that if investors keep their coins in their wallets for a year, the sale is not taxable. If you sell shares before this deadline, you must tax the gain at your tax rate. Anyone who trades in cryptocurrencies speculates on price gains. It is not the entire investment that is taxable, but the difference between the sales price achieved and the acquisition costs.
As with all private sales transactions, there is an exemption limit of EUR 600 per year for the taxation of cryptocurrencies. Attention: exemption limit and exemption amount are not identical. The entire capital gain must be taxed if the profits exceed the exemption limit by just one euro. In the case of an allowance, only the amount above the specified amount is taxed.
Investors must report profits from crypto trading in Appendix SO on their income tax returns.
The situation is different, of course, with companies that trade in digital money commercially. Here trading is not considered a private sales transaction. Accordingly, there are no advantages to a one-year holding period. The coins belong to the business assets.
Investors often buy cryptocurrencies at different rates. On the one hand, Bitcoin, Ripple, and Ethereum fluctuate considerably. On the other hand, the coins are traded at different prices on the crypto exchanges. In principle, the acquisition cost must be subtracted from the sale cost to compute the gain. Investors have two options for calculating their profits – and thus being able to answer queries from the tax office in a sound manner.
First: The FIFO method (“First in – First out”). She assumes that the coins that investors purchased sooner will also be traded preferably. It is worth using this method, especially during a bull market – i.e., when prices constantly rise. The counterpart to this is the LIFO method (“last in – first out”). The coins last purchased are sold first.
Which of the two approaches produces the most sense for tax objectives depends on the individual case?
An example: An investor bought Bitcoin shares for 1000 euros in January; in November, he bought further shares for 6000 euros. He sells one of his two purchases for 10,000 euros a month later. According to the FIFO method, his profit would be 9000 euros, while using the LIFO method, it would only be 4000 euros. It shows which method is ultimately cheaper depending on the individual case.
Important: The calculation using these methods does not work for all depots. Investors who trade on multiple crypto exchanges must therefore determine their profits separately. It doesn’t matter which option investors choose: it is advisable to document every transaction.
A distinction is made between direct and indirect investments in the crypto scene. Investors have physical bitcoins in their wallets when investing directly via crypto exchanges or marketplaces. With indirect investment, you only invest in the performance of the cryptocurrency. Different tax rules apply here.
Trading CFDs is considered a futures transaction for tax purposes. CFDs are “contracts for difference”, i.e., trading in contracts for difference. In principle, profits from this are taxed with the withholding tax: This amounts to a flat rate of 25 percent plus solidarity surcharge and, if applicable, church tax. If investors are customers of a German broker, the broker pays the taxes directly to the responsible tax office. If the broker is based abroad, investors must declare the CFD profits independently in their tax returns.
The participation certificate reflects the performance of the respective cryptocurrency and thus allows investors to participate in price gains. It is, therefore, a derivative – the withholding tax also applies here.
Yes. Any costs incurred, such as for the account with the Bitcoin exchange, CFD broker, or wallet, can be offset against the profits in the tax return. In addition, investors may offset losses from crypto trading against profits from the previous year or the future year in the form of a loss carryforward. Also, investors should keep an eye on crypto press release distribution platforms to keep themselves up to date about the market.
Electricity costs can also be tax-deductible under certain circumstances – but not for the conventional investor. This option is only available to the miners, who make the computing power of their computers available to mine new bitcoins and other cryptocurrencies and expand the blockchain.
India: 30% tax on bitcoin profit, 1% per transaction
According to the source, Indian Finance Minister Nirmala Sitharaman announced new tax rules regarding bitcoin. Under a bill, a 30% tax will be levied on profits made from bitcoin, and a 1% tax will apply to any transaction above a certain amount. A total ban seems off the table for now, but it doesn’t necessarily mean legalization.
Thank you for reading!