Do investors have to pay tax on their crypto assets? Or can they put in potential profits tax free without getting the tax office? The Federal Fiscal Court is currently dealing with this issue. Specifically, the proceedings at Germany’s highest financial court deal with the related question of whether Bitcoin and other cryptocurrencies are economic goods and therefore subject to taxation.
Federal Fiscal Court hears lawsuit from bitcoin buyers
The background is the appeal of an investor in Bitcoin and Altcoins. The proceedings were first heard before the financial court in Cologne. At that time, the judges came to the decision that cryptocurrencies are economic goods and that taxes on profits are also to be paid. However, the investor saw things differently and appealed to the highest court for the sum of 3.4 million euros. This review was granted because the tax treatment of cryptocurrencies has not been clarified by the supreme court.
So the judgment of the Federal Fiscal Court will make a fundamental decision on how the tax offices will treat taxpayers’ investments in the future. According to process observers, however, anything but a negative judgment would be a feeling for the plaintiff. Accordingly, it is assumed that the Federal Fiscal Court will consider Bitcoin & Co as an economic interest and that the tax registration is therefore legal.
A leading verdict for all buyers of cryptocurrencies in Germany
However, the outcome of the proceedings has not yet been decided. At the opening of the trial yesterday, the statements of the plaintiff’s investor and the responsible tax authority, which demanded the taxes on the cryptocurrencies, were read out. The basis of the tax office’s reasoning is a letter from the Federal Ministry of Finance. In May 2021, the supreme financial authority asked the tax offices to record sales in the course of crypto investments for tax purposes. Bitcoin & Co. was made. be rated as economic goods, so that they are relevant for income tax.
The Federal Fiscal Court could announce its judgment in a few weeks. No further hearing dates have been scheduled. Even if, according to observers, it is considered likely that the court will confirm the assessment of the Federal Ministry of Finance with its judgment, the judges are not bound. In theory, they could also decide in favor of the plaintiff. For him, it is about a large amount of taxes that he has to pay on his crypto profits or not. But the judgment should also be decisive for all other investors who are taxable in Germany and invest in cryptocurrencies and clearly determine what they must declare to the tax office and pay taxes in the future.
What if you have been paying taxes on crypto with crypto trades for years and now they are not taxable at all?
— SpewyStewie (@KTMRandomDude) February 14, 2023
Investors had declared crypto income in the tax return
After the previous decision from the Cologne Financial Court, the question is clear. Accordingly, cryptocurrency comes conceptually under the elements of other economic interest in the meaning of Section 23 (1) sentence 1 no. 2 sentence 1 EStG and therefore falls within the scope of income from private sales transactions.
In the specific case, the investor had invested in various cryptocurrencies such as Bitcoin, Ethereum and Monero, according to the written judgment available for inspection on the court’s website. He bought bitcoins between 2014 and 2016 when prices were still very low. He is said to have created an account on the bitcoin.de platform.
If he had bought bitcoins, he paid the money in advance by transferring the agreed amount of money to the account specified by the seller, and then the seller transferred the bitcoins. The names of these people could only be fictitious. He made his own private key. At “bitcoin.de” there was only one intermediate address, to which the business partner transferred the bitcoins. He then transferred them to a private address.
Earn profits with arbitrage on crypto exchanges
The investor seems to have benefited from the arbitrage as well. Because in the past it was only possible to make profits through the price differences of individual crypto exchanges on different assets – for example on exchanges in the USA and Asia. Meanwhile, however, the prices on the exchanges are almost at a level which means that arbitrage is hardly profitable anymore.
At the beginning of 2017, the plaintiff had previously received bitcoins. In January 2017, he first exchanged these for Ethereum tokens and the Ethereum tokens for Monero tokens in June 2017. At the end of 2017, he exchanged some of his old coins from Monero back to bitcoins and he sold them in the same year.
Therefore, the investor made various transactions with cryptocurrencies in which he was able to make profits from the sale. He used various crypto exchanges for buying and selling. According to the plaintiff, he reported a profit of approximately 3.4 million euros from the sale in his 2017 income tax return as income from private sales transactions in accordance with Section 22 No. 2, Section 23 Section 1 Sentence 1 No. 2 of the Income Tax Act (EStG). The tax office determined the income tax accordingly.
The plaintiff does not see Bitcoin as an economic benefit
The plaintiff then lodged an objection. As justification, he essentially stated that there was a structural deficiency in the taxation of capital gains from cryptocurrencies and that there was a violation of the principle of certainty. Therefore, these gains should not be taxed. Incidentally, cryptocurrencies do not have the necessary sale of “economic interest”.
The Financial Court of Cologne did not agree with this opinion and dismissed the lawsuit. There is no structural enforcement deficiency. In particular, this is not justified by the anonymous sale. Otherwise, the requirements for a private sale transaction are met. These currencies are “other economic goods” within the meaning of Section 23 Section 1 No. 2 EStG.
The court also stated that the qualification as an economic interest does not violate the principle of certainty, since there is no ambiguity as to the purpose of the economic interest. The crypto values traded by the plaintiff (Bitcoin, Ethereum and Monero) are tradable and independently assessable. In addition, there is structural comparability with foreign currencies.
Investors will soon find out if the Federal Fiscal Court will uphold this decision.
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