The tax payer argued that the bitcoins they acquired would not qualify as an "asset" under German tax law because no commercial value could be attributed to them, so the income derived from the disposition would remain untaxed. Under German personal income tax law, income derived outside the scope of a trade or business by a private individual generally is not taxable unless it is derived from the disposition of an "asset" within a short period of time (one year for non-real estate assets and 10 years for real estate assets). Different rules apply for securities and other financial assets. German tax law defines an asset as a legal or factual position to which a value can be attributed and for which a reasonable business man would pay a consideration.
According to the tax payer, the bitcoins only represent a vague chance or opportunity to enter into a transaction and receive valuable goods, services, or money in exchange for the disposition which could not separately be valued. The tax payer also took the position that due to the technical process of the mining, only a virtual item with no real value was created and that the consideration paid was in fact a compensation for the effort of the miner. As a consequence of this understanding, the tax payer took the position that the income he derived from the disposition of the bitcoins was not taxable at all.
Executive summary
The court confirmed that a bitcoin qualifies as an "asset" for German taxation and (tax) accounting purposes.
At the same time, the court concluded that a bitcoin is not a security or financial asset because it does not represent a claim for (re)payment of money.
The capital gain derived by a private individual is taxable if realized within one year after the acquisition (that is, a disposition after one year would not be taxable).
The German Generally Accepted Accounting Principles (GAAP) applicable to intangible assets apply to bitcoins if held as a business asset.
Analysis
The decision confirms the prevailing view of practitioners (including the tax administration) in Germany which always considered the Bitcoin and other crypto currencies as "assets." Beyond the case at hand, the decision at hand has a number of consequences, in particular for tax payers who are subject to German tax accounting rules and German GAAP:
First, the acquisition cost for a bitcoin needs to be capitalized and cannot be deducted from the (taxable) income as an expense.
Second, a German "miner" generally needs to capitalize the bitcoin they create as a current asset should they envisage to sell it (hence no deduction or loss can be claimed for tax purposes in this case).
Third, a bitcoin recorded on a German GAAP balance sheet needs to be written down only in case there is an impairment which, based on a forecast, will last for a certain period after the balance sheet date.
Fourth, a German private individual who holds a bitcoin as a private asset may realize a tax-free capital gain in case they dispose the bitcoin more than 12 months after the acquisition (as a flip side, a loss would only be taken into account - subject to certain ring-fencing rules - in case the bitcoin is disposed within the first year after acquisition). In contrast, a capital gain derived from a bitcoin held as a business asset would always be taxable (and a loss would reduce the taxable income).
The decision also indicates that security "tokens" and other digital instruments issued by businesses in exchange for the payment of money should qualify not only as "assets" but rather as securities or financial assets which would result in a different taxation compared to a bitcoin. Securities, capital gains, or other income derived from such instruments would always be subject to taxation in the hands of private individuals at the applicable rate for investment income (26.375 percent plus "church tax" if applicable) irrespective of a holding period. However, in case the asset is held as a business asset, the owner may benefit from a beneficial tax regime should the instrument qualify as equity for German tax accounting purposes.
Client Alert 2020-065
