"This is the Wild West of taxation!" - Felix1 tax consultant and crypto expert Evelyn Klieber on crypto taxation in a fynax interview

Do profits from cryptocurrencies have to be taxed? And are crypto coins an "asset" in the traditional sense? On February 14, 2023, the Federal Fiscal Court issued its first ruling on these income tax issues relating to crytpo assets. Verdict spoken. In the fynax interview, Felix1 tax consultant and crypto expert Evelyn Klieber outlines what needs to be considered when taxing crypto coins and what has changed for online traders as a result of the BFH ruling.

---

Everyone thinks of crypto coins and digital currencies such as Bitcoin or Ethereum when they hear the term "crypto". But this is incomplete. What does the generic term crypto actually stand for?

Crypto is essentially about blockchain technology. A crypto asset usually consists of a digital work whose value is continuously recorded in a large database. This database or programming is known to us as a blockchain, as it is continually updated with new entries. The special thing about the blockchain is that it functions as a kind of digital cash book in a decentralized network and enables all crypto transactions to be checked and approved. Unauthorized changes to the database are not possible. This makes blockchain one of the most secure technologies.

Let's take Bitcoin as an example: even the largest cryptocurrency is a product that can only exist thanks to the blockchain, i.e. the underlying database. But at the end of the day, crypto - like the stock market - is also about market capitalization, i.e. how many people have invested in relation to the coins issued. In the global ranking, the largest 10-20 crypto coins determine the market. Everything that follows are speculative "gambler" coins, where you can get in cheaply and hope for a high market development. In my opinion, the people who have invested today or are still doing so are still at the birth of crypto. The development potential is still very high.

In addition to crypto coins, there is also the so-called "Web3", a technological implementation and new edition of the World Wide Web, which is based on the blockchain and includes token-based economic approaches. Web3 is representative of everything that is evolving in this process, i.e. the further development of the internet, programs and the associated apps. It is also interesting to note that the transfer history of crypto coins can always be viewed publicly thanks to the blockchain. In summary, it can be said that crypto does not just consist of crypto coins or currencies, but of the entire Web3 technology and everything that goes with it.

What do entrepreneurs and private individuals need to bear in mind when it comes to taxation?

This is the Wild West of taxation! Hence an important question for all private individuals or entrepreneurs who are active in the crypto sector. The tax office is around two years behind current technological developments and therefore still has some catching up to do when it comes to taxation. However, it is important for entrepreneurs and private individuals to know today what to look out for when it comes to the taxation of crypto transfers. My tip and personal advisory approach: be open with the tax office. Even if your own tax advisor tells you that your crypto transfer transactions are not taxable in the second step, you should be aware that basically everything is taxable. That's why the safe and smart approach would be to work openly and transparently with the tax office. This means: provide the tax office with information about your transactions and the "public keys" of your digital crypto wallet so that they can at least partially trace your income. In this way, you signal your tax honesty, prevent the tax office's basic mistrust and avoid unnecessary criminal tax proceedings through transparency and communication.

A new ruling by the Federal Fiscal Court on crypto taxation was passed in February: What has changed as a result?

In detail, the new ruling by the Federal Fiscal Court states that the cryptocurrencies Bitcoin, Monero and Ethereum are "assets in the private asset sector" that must be taxed accordingly. Here too, however, a distinction must be made: am I active in the private, business or corporate sector? In the case of business assets, you are liable for income tax. Business assets, on the other hand, are subject to VAT and therefore need to be considered separately.

The current situation classifies cryptocurrencies as non-taxable for VAT purposes. It should be noted that the MiCA (Markets in Crypto Assets) Directive was recently adopted at EU level, which will take effect in the future. For income tax purposes, however, i.e. as part of your business assets as an entrepreneur, it is always taxable. Everything that you assign to your business assets must be taxed, including crypto transactions. In terms of VAT, however, you have to ask yourself the question: Did I buy crypto coins in exchange for real hard cash? Or have I sold something and received cryptocurrency in return, in other words, have I made an exchange transaction with cryptocurrency? A common mistake in the private sector is the assumption that crypto coins can be held tax-free for a year. This is because many people forget that holding coins generates regular income, for example through rewards. There are other allowances for this.

So virtual currencies are now economic goods. How can this be explained? And what do we need to pay particular attention to now?

Now it's mandatory to keep records! Above all in the area of business assets, there is an accounting obligation; assets and liabilities and assets must be shown in your balance sheet. This means that every single trade must be booked individually. Of course, this is impossible for traders who execute tens of thousands of trades per day. And this is precisely the catch: it is simply not feasible to book everything individually and unfortunately there is still no all-round program that could deal with this. Even the current accounting programs are not yet able to accurately map cryptocurrencies and transactions, which is why it is all the more important to proactively disclose your digital wallet and transaction history in cooperation with the tax office. This prevents potential criminal tax proceedings and helps to create a sustainable basis of trust.

To what extent could the ruling have an impact on online retailers?

The ruling has a massive impact on the fulfillment of the accounting obligations of online retailers. The record-keeping obligation of the individual and the procedural documentation are considered the be-all and end-all of every e-commercer. Every single business transaction must be archived in a form specified by the tax office. At the moment, I recommend that everyone consult a tax advisor who is familiar with the subject of cryptocurrency. This is the only way to ensure that you as an online retailer behave in a tax-compliant manner and do not make any unintentional mistakes.