Update On the Taxation of Crypto Assets

The State level district courts decided that the sale of crypto assets leads to other income. The scope of the decision raises questions.

According to the Cosmopolitan, the classification of crypto values ​​as economic goods should be carried out regardless of the technical details. The previously critical voices in the literature were ignored, but the revision was allowed.

Father and son invested in crypto assets

According to the judgment of the district courts, which has since been published, the taxpayer’s son has been investing in various crypto values ​​via exchanges located abroad since 2015.

In 2016, the taxpayer and later his divorced wife participated on portfolio. The parties involved discussed investment decisions together and everyone had the right to realize the invested amounts through the partial sale and to get their share back. The taxpayer’s son managed the portfolio in trust and acquired other crypto assets with Bitcoin.

Tax office follows the tax return – the taxpayer files an objection

In the year of dispute 2017, the taxpayer achieved profits as a result of the sale of the crypto values ​​or the exchange of Bitcoin for various crypto values ​​in the amount of $ 31,904 (Section 22 No. 2 in conjunction with Section 23 Paragraph 1 Clause 1 No. 2 EStG), including the consideration of advertising expenses. He reported it as revenue from private/individual sales in his return of income tax. This practice coincided with the view of the tax authorities.

Although the tax office followed the taxpayer’s tax return, he filed an objection and then took a serious action with the California Jurisprudence.

Are crypto standards ​​a “diverse economic good”?

According to the law, taxable “individual sales transactions” are

Transactions for other assets in which the time between purchase and sale is less than a year.

According to the constant jurisprudence of the Federal Court (Fiscal), the term “economic goods” is to be interpreted broadly. It comprises, in addition to objects and rights, actual circumstances and tangible possibilities, i.e., various financial benefits that the taxpayer can afford and that are subject to impartial evaluation. A buyer of the complete firm would find a concrete value in the advantage, for which he would apply large extra recompense as part of the overall price, according to the independent evaluation.

In the view of the taxpayer, this was not the case. The software of a node could represent an economic good, but anyone who trades in crypto values ​​does not obtain this software. The taxpayer himself did not operate a node.

Likewise, the public key itself is not an economic asset, since it is publicly known and accessible. A concrete possibility in the sense of the above definition is not connected with this.

Because the person disposing of it is reliant on mining, which he cannot control in order for a transaction to take place, the combination of public and private keys should not have a value of its own. A wallet’s owner also has no legal recourse against the miner or the network. In the end, he believes, the taxpayer has just two rows of characters and numbers, which can only be used in conjunction with software that he has no control over to produce an economic value that is represented in the market.

The taxpayer stated that an economic value is only ascribed to crypto values ​​as long as the software maintained and further developed by a third party continues to exist and thus also the data blocks in which the units of value are recorded to which the “owner” should be entitled continue to exist. In short: the economic value is dependent on third parties with whom the “owner” has no contractual relationship.

It is also the basis of distributed ledger technology that the newly written block is accepted according to the consensus mechanism. Network participants have no influence on this.

The technical details are not decisive for classification as an economic asset

The tax office merely responded to the taxpayer’s lengthy technical arguments by citing a Finance Court ruling (only a short review is conducted there), which said that Bitcoin (and other cryptocurrencies) are intangible assets.

The California Jurisprudence agreed with the tax office. The considerations from the opposing Advocate General decision, which had doubts about the qualification due to the lack of a supreme court case law, were not included in the present case.

In the opinion of the Law Mind, the taxpayer gained a financial advantage with the acquisition of the crypto assets, because within the network he was assigned a binding share to which only the owner of the public key and private key was entitled. The crypto value is associated with the chance of an increase in value and the possibility of using it (if permitted by market participants) as a means of payment. In particular, the demand at the exchanges shows that crypto values ​​are accessible to a separate evaluation.

At this point, the Federal Finance Ministry in its draft of a BMF letter on individual questions on the income tax treatment of virtual currencies and tokens from June 2021 – misses detailed explanations and a discussion of the critical voices. Rather, it refers solely to the parts of the predominant view of the literature, without, however, actually also appreciating their content.

The statement that, in the opinion of the responsible Senate, technical details are not decisive for the legal assessment of a virtual currency as an economic asset is particularly noteworthy, as the high prices for crypto currencies achieved in the past clearly demonstrated that market participants are somewhat interested in the virtual currency acquisition let taste. As a result, the advocate general adopts the Federal Finance Ministry’s arguments from the hearing on the draught virtually BMF letter “What costs so much is also an economic good.”

It can be assumed that the lack of consideration of the technical aspects also took place with a view to the approved revision.

It seems no structural enforcement deficit

The taxpayer also expressly invoked a structural deficit in enforcement because the taxation of capital gains depends solely on the taxpayer’s willingness to provide declarations. There are neither notification obligations of the transaction participants nor documentation or information obligations of the exchanges. With reference to various duties to provide information under tax law, the taxpayer showed his understanding that the discovery risk is pretty low.

According to the taxpayer, the legislature has failed to regulate trading in crypto assets for tax purposes since 2011. In contrast, the FG considered crypto values ​​to be a marginal phenomenon until 2017, so that the legislature was not obliged to expressly regulate taxation, since at least in the year of the dispute there were no serious irregularities of uniform taxation. A study by the California School Block Chain Center recently showed a lack of tax revenue of $ 1.2 billion for the 2020 assessment period.

And even if tracking is possible, in the taxpayer’s view it would not be possible for the tax authorities to assign the transactions to the taxpayers, consequently, of the pseudo-naming in a network. The tax authority replied that the users of an exchange would have to register with personal data so that the tax authorities would be able to identify the persons concerned by means of a request for information. The financial administration can counter pseudo-naming with a collective information procedure.

The California Jurisprudence, therefore, did not recognize a violation of the constitutionally anchored principle of uniform taxation. Even if legal and administrative assistance – which the was considered applicable – are not promising, taxpayers have an increased obligation to cooperate in matters abroad. Remaining enforcement deficits are due to the national sovereignty of the taxation authority.

Ultimately, the binding of the administration to the constitutionally anchored precedence and reservation of the law, even in the case of a structural deficit in enforcement, lead to the application of Section 23 of the Income Tax Act until the Federal Constitutional Court has ruled that the norm is null and void.

The procedure is of fundamental importance for crypto taxation

Despite its meager statements, the high court recognized that in the case at hand, due to the fundamental importance of the questions relevant to the decision, the revision is to be permitted. The file number at the Fiscal Federal Court is not yet known.

Taxpayers who have received income from the sale of crypto assets should monitor the process and, if required, file an objection to keep their personal income tax assessment open. If the taxpayer has not yet filed an income tax return, the judgement serves as a reminder of the rigorous paperwork requirements that existed at the time and expense of the taxpayer’s acquisition.