Taxes related to cryptocurrencies are not explicitly regulated in German tax laws. Since the inception of the Bitcoin blockchain in 2009, the attention of financial authorities gradually shifted towards developments in the crypto space.
Following the Bitcoin hype in December 2017, the interest of tax authorities became more focused. However, unlike Switzerland, France, or Austria, the German tax legislator did not see the need to enact its own rules for this matter. Various court decisions in 2019 (FG Berlin-Brandenburg), 2020 (FG Nürnberg), and 2021 (FG Baden-Württemberg and FG Köln) did not reveal a consistent approach.
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Legal developments in Germany
Nevertheless, the prevailing intention of the judiciary seemed to be to allow for the taxation of blockchain entries even without specific legal regulations. In some cases, technical details were considered non-essential to achieving this goal and were largely ignored, which raised additional concerns.
As expected, tax authorities gradually turned necessity into virtue, and in May 2022, they issued a so-called BMF letter (a letter from the Federal Ministry of Finance addressed to subordinate tax authorities) regarding the taxation of virtual currencies. This attempted to replace the lack of legal regulation with guidelines that would make a taxation claim appear well-founded and facilitate enforcement against taxpayers.
Current tax measures for cryptocurrencies
In February 2023, the Federal Fiscal Court (Bundesfinanzhof) surprisingly issued a somewhat debatable judgment (Case No.: IX R 3/22) on the taxation of three cryptocurrencies (Bitcoin, Ethereum, and Monero). It significantly expanded the concept of constitutionally protected property rights with questionable reasoning.
Shortly thereafter, tax authorities began nationwide efforts to compel taxpayers to retroactively disclose previously undisclosed crypto transactions, based on data obtained from a German cryptocurrency exchange. This automatic disclosure requirement is expected to apply to more than 26,000 other cryptocurrencies and their resulting (sometimes purely virtual) earnings, which have been listed on coinmarketcap.com.
Some of these measures are accompanied by simultaneous initiation of tax fraud proceedings, putting additional pressure on taxpayers. In this context, individuals are always referred to their obligations under tax laws, and extensive documentation is demanded. At the same time, a tougher approach is threatened in cases of non-cooperation. The review responsibilities of tax authorities and the limited ability to investigate and pursue taxpayers who exclusively trade on foreign cryptocurrency exchanges are generally not discussed.
Growing demand for retroactive compliance with regulations
The specific challenges of achieving consistent taxation, such as those brought by the use of decentralized exchanges, are not discussed. Additionally, the financial authorities do not seem to question the need for nationwide, orderly enforcement.
At the same time, the Federal Fiscal Court's judgment from February 2023 effectively denies the existence of an apparent enforcement deficit - one that presumably still leaves most crypto traders in Germany unaffected. As a result of this situation, there has been a significant increase in individuals seeking legal advice in recent weeks, wanting to retroactively declare previously unreported cryptocurrency transactions.
Some of this motivation is self-driven, aiming to regain peace of mind. However, in some cases, notifications from tax authorities with tight deadlines or the announcement of ongoing criminal proceedings have sparked sudden motivation among affected individuals.
While the tax law situation regarding the taxation of so-called cryptocurrencies in Germany remains far from clear, cryptocurrency enthusiasts who are subject to taxation now face significantly increased scrutiny from tax authorities.
As this scrutiny can be abrupt and rigorous, it has had a significant impact on many individuals. Regardless of the specific allegations, those affected should seek competent advice before reacting hastily to seemingly concrete but potentially unfounded evidence. In practice, it is often the case that the seemingly extensive allegations are based on weak and unjustified grounds.
Only when the tax authority's claims are built on sufficient legal and factual foundations should taxpayers follow the tax authority's position. In all other cases, a robust defense of the legitimate interests of the respective taxpayer is essential to unequivocally and sustainably dispel unjustified suspicions.