Almost a year after the Federal Ministry of Finance’s (Bundesministerium für Finanzen or BMF) initial draft, the BMF has now published its final letter on the income tax treatment of cryptocurrencies.
Definitions comprehensively supplemented
As can already be seen on the second page of the final letter, the BMF states that for regulatory purposes the terms "cryptocurrency" and "crypto securities" are to be used for tokens. However, this should not give the impression that the regulatory classification is relevant for income-tax treatment.
The BMF sharpened the definitions and is showing an interest in understanding the technical basis. In particular, the BMF is responding to criticism of the opinions provided on the draft regarding "proof of stake" and "staking" by providing detailed definitions. It distinguishes between "validated staking" (or forging) and "delegated staking".
Fortunately, the BMF has also recognised that the "wallet" is not the wallet of units of a virtual currency and tokens, but rather contains a combination of "private key" and "public address".
Asset value also visible without a tax return
We have already discussed in connection with the Crypto-Asset Reporting Framework (CARF) that with knowledge of the "public address", the BMF will be able to track current asset value in the future. The knowledge that "block explorers" exist has been set out in the letter.
At the same time, however, the letter also explains that the visible addition or disposal of units of a virtual currency and tokens does not necessarily need to coincide with the acquisition or disposal dates that are relevant for income-tax purposes.
Units of a virtual currency and tokens are assets
The BMF reiterated its view that virtual currency units and tokens are assets. The tax authorities are, therefore, in line with the case-law of the tax courts.
According to the established case-law of the German Federal Fiscal Court, the term "assets" is to be interpreted broadly. In addition to property and rights, it also includes actual conditions and concrete possibilities (i.e. all pecuniary advantages, the attainment of which costs the taxpayer, and which are amenable to independent valuation). Independent valuation means that a purchaser of the entire business would see a tangible value in the benefit for which he would apply weighty special consideration in the context of the total price.
According to the BMF, virtual currency units and tokens convey the ability to assign the asset-based benefits of one's own public key to another public key. On the basis of their market price, which can be determined regularly via stock exchanges and trading platforms and lists, they are accessible for independent valuation.
Attribution to the owner
Presumably, the BMF’s Department IV C 1 has carefully studied the comments made by the Cologne Fiscal Court regarding the contradiction to tax allocation (§ 39 German Fiscal Code (AO)). Without elaborating more on the civil law owner, the letter defines that the beneficial owner is whoever can initiate transactions and therefore "dispose" of the allocation of the units of a virtual currency or other tokens to public keys. This is normally the owner of the private key.
Mining and validated staking are acquisition processes
Mining and validated staking are acquisition processes, but not necessarily commercial. Instead, the BMF recognises that the respective activity can also be assigned as a subordinate to private asset management. However, the BMF primarily assumes a commercial activity, as "rewards" and "fees" are paid to the creator in exchange for the creation of new blocks. Nevertheless, the explicit refutability of the presumption of commercial, trade or business activities, which was still contained in the draft, is missing in the final statement. Therefore, the general principles are likely to apply.
Contrary to the original three, it is now the price of an "exchange" or a web-based list that will suffice for the initial measurement of business assets, provided no stock exchange price is available.
Staking pool or platform staking
The participation in a staking pool (different to a mining pool) or platform staking leads to other income (§ 22 (3) German Income Tax Act (EStG)). The BMF is referring here "delegated staking" (i.e. people make units of a virtual currency available for a stake without actually being involved themselves as "validators" in the creation of the block). The acquired units of a virtual currency are to be recognised at the market rate at the time of acquisition.
No extension of the holding period
The extension of the holding period to ten years numbered among the biggest criticisms from the opinions provided on the draft. The BMF has recognised the advantages for Germany as a crypto location and explicitly does not apply the regulation on extension in private assets.
Important change for employee tokens
The draft letter stated with regard to the valuation of non-cash benefits in connection with the distribution of tokens to employees that the non-cash benefit was to be valued in accordance with the general provisions – at the final price at the place of distribution reduced by the usual price discounts at the time the entitlement was granted (§ 8 (2) sentence 1 German Income Tax Act (EStG)). This statement or the connection to the granting of the entitlement could be understood in such a way to mean that if the entitlement is granted early on, the employee could benefit from what may still be a favourable price at this point, and the benefit of pecuniary value can therefore be kept low, even if the tokens do not accrue until a later point in time. This would correspond to guideline 8.2. para. 2 p. 7 Wage Tax Guidelines (LStR), according to which, in the case of non-cash benefits and divergent order and delivery dates, the circumstances on the order date should be decisive for determining the offer price.
However, it had already become clear during the consultation process for the draft letter that the BMF does not actually see this design option. The final letter now clarifies this insofar as it is the point in time of the accrual that should be decisive for the valuation. The BMF does not clarify how this is compatible with guideline 8.2. para. 2 p. 7 Wage Tax Guidelines (LStR).
Supplementary letters planned
During the 1st Blockchain Roundtable, in which CMS Hasche Sigle was also a participant, the BMF already communicated that it intended to supplement these letters with supplementary letters in a timely manner. The BMF has deleted the placeholder for cooperation and recording obligations and – according to Möhlenbrock – has already planned to coordinate with the federal/state working group for the first supplementary letter in the summer of 2022. There will also be a supplementary letter on the income tax treatment of "decentralized finance" and "non-fungible tokens".
No Protection of legitimate expectations
The principles of the letter are to be applied to all open cases. Taxpayers who have not yet prepared their tax return should, in consultation with their tax advisor, be aware of the contents of this letter when preparing their tax return and explicitly explain any differing views. If tax returns have already been filed and income tax assessments have been announced, they can be kept open by means of an appeal. In any case, this is required against the background of the pending action at the German Federal Fiscal Court regarding the taxation of trading as a private sale transaction.
For more information on the final letter and cryptocurrency regulations in Germany, contact your CMS client partner or CMS experts: