How Bitcoin Losses Translate to Taxes

• Dunstan Andre
• 0 comment
• September 11, 2022

Bitcoins are a digital, anonymous, central bank-independent currency. But many don’t really know what exactly that is and how it works. What is widely perceived, however, are press releases about the extreme increases in value, especially in recent times. At the beginning of 2017, Bitcoin was still trading at around $1,000 on exchanges and platforms – and on November 28, 2017, it cracked the $10,000 mark.

On December 6, the price broke through the $12,000 mark, on December 7 it even broke the $14,000 mark, and just before Christmas, it was worth a whopping $20,000! After Christmas, however, the price was again around 17,000 dollars. Anyone who is now the happy owner of a Bitcoin considers whether he should turn the gigantic virtual price gains into real money gains and what tax consequences this probably has.

The tax authorities have clarified that Bitcoins can be the subject of a private sale transaction pursuant to § 23 para. 1 no. 2 EStG (BT-Drucksache 17/14530 of 9.8.2013, p. 40).

This means:

• The exchange or exchange of Bitcoins into euros or another cryptocurrency within one year after purchase leads to a private sale transaction in accordance with § 23 para. 1 no. 2 EStG. So if euros are exchanged for Bitcoins, the economic asset “Bitcoin” is purchased. You should definitely record the time of purchase, purchase price, and purchase quantity.
• If Bitcoins are sold again within 12 months of purchase, i.e. exchanged for euros, profits are taxable in full as “other income” according to § 22 No. 2 EStG at the individual tax rate. However, withholding tax does not apply to this. However, a profit remains tax-free if it remains below the exemption limit of EUR 600. Losses may only be offset against profits from private sales transactions, namely by offsetting losses in the same year and by deducting losses in the previous year and/or in subsequent years. The transactions shall be indicated in “Appendix SO”.
• If the sale of Bitcoins takes place after 12 months, profits are completely tax-free and losses are tax-irrelevant.
• If Bitcoins are purchased one after the other and held in the same custody account, the “First in, first out” rule applies: For the calculation of the speculation period and the capital gain, the first Bitcoins purchased are considered to be sold first (FinMin. Hamburg of 11.12.2017, S 2256-2017/003-52).
• If interest income is generated from the Bitcoin investment as a source of income for at least one year, the speculation period is extended from 1 year to 10 years (§ 23 para. 1 no. 2 sentence 3 EStG).

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If cryptocurrencies are purchased or produced in the context of commercial activity with the intention of making a profit, profits from the sale or exchange of the cryptocurrency are to be recorded within the framework of the “income from commercial operation”. The cost of mining the cryptocurrencies is deductible as operating expenses.

Currently, certain tax courts have expressed doubts about the opinion of the tax authorities. It is true that there is only one decision in a so-called suspension procedure; the decision on the substance of the case is therefore still pending. However, the judges point out that the Federal Finance Court has not yet decided on the tax treatment of cryptocurrencies. Therefore, there are considerable doubts about the legality of the taxation of cryptocurrencies, which would justify a suspension of the enforcement of the contested tax assessment.