A German plaintiff who tried to argue that $3.6 million in cryptocurrency profits is not taxable income but instead constitutes a “dataset” lost in Germany’s largest financial court on February 28.
In an important ruling on virtual currency tax registration, Germany’s Federal Fiscal Court (BFH) has ruled that capital gains from cryptocurrency transactions are taxable.
Pursuant to regulations regarding income from private sale transactions, cryptocurrency investors are obliged to declare these profits on their income tax returns.
On February 28th, the BFH declared that cryptocurrencies would be considered economic goods subject to income tax on private sale transactions if bought and sold within one year.
However, if the investor holds the currency for more than one year, German law makes the profits tax-free. This is different from stocks.
Investors did not view the ‘dataset’ as a taxable asset
according to the german newspaper Frankfurter Allgemeine Zeitunghad a disagreement with the tax office on whether certain profits derived from cryptocurrency trading are subject to income tax.
Plaintiffs argued that cryptocurrency gains are records and therefore cannot be classified as “commercial assets” subject to income tax.
Plaintiffs also argued that the lack of effective enforcement makes taxation impractical because only honest taxpayers report their investments in cryptocurrencies, resulting in an unconstitutional “stupid tax.”
However, the Cologne Financial Court dismissed the case in 2021, and also lost cases challenging similar virtual currency taxation in the financial courts of Baden-Württemberg and Berlin-Brandenburg.
The Nuremberg Financial Court has raised questions about whether speculative transactions involving cryptocurrencies are subject to income tax, but these decisions do not affect decisions made by the federal BFH decision this week.
A German court has ruled that virtual currencies can be taxed because they have market value.
The ruling means that cryptocurrencies such as Bitcoin and Ethereum are considered payment instruments traded on platforms and exchanges, have market value, and can be used for payment transactions between parties.
This is the economic outlook for these currencies, supported by BFH, in line with the federal legal opinion presented through our Guide to Income Tax Treatment of Bitcoin and Other Crypto Assets in May 2022.
BFH also addressed plaintiffs’ claims that only honest individuals pay taxes on their cryptocurrency profits, stating that there is no structural flaw in enforcement. The lack of collection rules and evidence that tax authorities are unable to record profits and losses from cryptocurrency transactions indicates otherwise.
BFH considered cases where investigative measures, such as requests for aggregate information, failed, as individual cases do not warrant structural flaws in enforcement.
The amount of tax revenue the Treasury receives from cryptocurrency transactions is unknown, as income on which income tax is payable is typically not attributable to a specific asset, such as certain capital gains.