The German Federal Fiscal Court (BFH, Urteil vom 14. Februar 2023 – IX R 3/22) confirms the opinion of the fiscal court of Cologne that sales profits from cryptocurrencies are taxable. The court decided that cryptocurrencies qualify under the term “other assets” (“andere Wirtschaftsgüter”) in the meaning of the German Income Tax Act (EStG) and therefore generally are taxable assets. The court further denied that such taxation would violate German constitutional law.
Case to Decide
In the case at hand, the claimant had profits arising from sales of several cryptocurrencies (BTC, ETH, XMR). The tax authorities classified the declared profits as income taxable sales profits arising from the sale of “other assets” pursuant to sec. 23 para. 1 no 2 EStG. The claimant’s lawsuit at the fiscal court of Cologne hasn’t been successful, as the court shared the opinion of the relevant tax authorities. The claimant’s appeal, the German Fiscal Court (“BFH”) confirmed the opinion of the first instance and the tax authorities.
Cryptocurrencies as Other Assets
A taxation of private sales pursuant to sec. 23 para. 1 no. 2 EStG requires the sale or exchange of other assets (“andere Wirtschaftsgüter”) within one year after purchase. Regarding cryptocurrencies, it was unclear whether they qualify as other assets in the aforementioned meaning. According to the BFH, other assets can be material and immaterial items (as defined by law), rights, specific possibilities, and advantages. Further on other assets must be assessable and generally be of benefit for future business years. The definition follows an economic interpretation and valuations under civil law and are not finally decisive, as the term of other assets in this case is a fiscal term.
From a technical point of view Cryptocurrencies, such as Bitcoin, Etherum, and Monero are encrypted packages of data, regardless of technical details of the single cryptocurrency. The BFH clarifies that technical details are not decisive for an assumption of other assets. Therefore, cryptocurrencies are classified as other assets. Especially from an economic point of view, cryptocurrencies are used as means of payment and are tradable on special platforms. For this reason, tokens of any cryptocurrency can result in an economic advantage in the case of sales.
Such definition of cryptocurrencies as other assets is in line with the circular of the German Federal Ministry of Finance (“BMF”) dated May 10, 2022. Please see our Client Alert from May 18, 2022.
The BFH also denied the claimant’s argument that an economic ownership in the meaning of sec. 39 Fiscal Code (AO) with respect to tokens of cryptocurrencies wouldn’t be possible. The court rules that, different from civil law, economic owners of tokens of cryptocurrencies is anyone who has a legal power regarding tokens of the cryptocurrency.
Possible Violation of Constitutional Law
In line with the fiscal court of Cologne, the BFH denied a violation of constitutional law. Generally, a violation of constitutional law could be assumed in case of a lack of equal and consequent taxation fulfilling the requirements of a structural legal deficit (“Strukturelles Vollzugsdefizit”). Such a structural legal deficit requires on the one hand contradictory and ineffective regulations that lead on the other hand to an inequality in tax burdens.
The BFH clarified that the regulation in question (Sec. 23 para. 1 sentence 1 No. 2) wouldn`t be contradictory and ineffective. Furthermore, the BFH didn`t follow the claimant`s argument that a structural legal deficit would arise from the fact that the taxation of sales of cryptocurrencies would solely rely on the honest declaration of the taxable person. The pure fact that technical aspects and the anonymity of traders complicate the tracking of profits wouldn`t be sufficient to assume such a structural legal deficit. The BFH further explains that the tax authorities already would have sufficient legal information rights—also at an international level—to ensure a proper and equal taxation.
Conclusion and Outlook
The decision of the BFH unsurprisingly is in line with the opinion of the tax authorities as well as the prevailing opinion of the German lower fiscal courts and a continuation of the efforts to clarify the taxation of cryptocurrencies. In addition, the decision gives answers to certain open questions regarding cryptocurrency taxation.
Taxpayers that might have profits from sales of cryptocurrencies should review if these profits might be affected by the decision of the BFH and declare any such profits properly if the named profits are taxable pursuant to sec. 23 par. 1 no 2 EStG. Missing and incomplete tax declarations might result in penalties by the German tax authorities or even lead to criminal investigations. In case of legal uncertainty, it is recommended to declare the profits anyway.
It is likely to see a new circular of the BMF updating the existing circular, dated May 10, 2022, that might also clarify further tax implications concerning the taxation of cryptocurrencies.
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