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Bitcoin and Tax: Cryptocurrencies in Your Tax Return

Jana Teuber
13. December 2021

When it comes to taxes, bitcoins are not currency. The purchase and sale are, therefore, not subject to the usual taxation. Nevertheless, the tax office has been taking a close look at bitcoins in recent times.

How are bitcoins taxed?

Despite the COVID-19 crisis, investors continue to strive for high profits. As a result, cryptocurrencies such as Bitcoin have stolen the spotlight. That being said, cryptocurrencies are not legal tender in Germany: they cannot be compared with income from stocks, investments, or other financial transactions when it comes to taxes.

According to the tax office, the income from trading bitcoins and other cryptocurrencies are comparable to profits from works of art or other valuables. Thanks to this, the profits from the sale of digital currencies can be tax-free.

So, Is Bitcoin Tax-Free?

Bitcoin may be tax-free, depending on how you deal with it. When it comes to taxing bitcoins, you need to keep two things in mind:

  • The income or profit that you made by selling your bitcoins
  • The length of time you owned the bitcoins
  • Bitcoins and Tax Exemption

    If you have owned bitcoins for over a year, the sale is tax-free regardless of the amount you profit by selling them. Furthermore, you don’t need to declare them in your tax return!

    If you sell bitcoins again within twelve months of buying them, profits up to an exemption limit of 600 Euros are tax-free. However, profits over 600 Euros from selling bitcoins are subject to tax. Even if your profit is only 1 Euro more than the non-taxable value, you are obligated to pay taxes on the entire profit you’ve earned.

    Note:
    The 600 Euro tax-exemption limit applies to the private sales and transactions of bitcoin and other cryptocurrencies, provided the transaction occurs within one year of purchasing them.

    For instance, if you sell a painting within a year of buying it with a profit of 700 Euros, you have already exceeded the full exemption limit. So, the profit from your bitcoin sales is irrelevant.

    The Holding Period of Bitcoins

    If you buy and sell bitcoins often, it can be tricky to determine the exact holding period. After all, it is tedious to assign the date of purchase or the date of sale to every bitcoin.

    First-In-First-Out Method (FIFO)
    To include the income from your bitcoin sales in your tax return, you can use the FIFO method. This means that you first sell the bitcoins that you bought first.

    Let’s look at an example:

    Purchase 1: April 5, 2016- 2 Bitcoins, each costing 233.90 Euros
    Purchase 2: December 17, 2016- 2 bitcoins, each costing 421.87 Euros.

    Now, let’s get to selling the bitcoins!

    Sale: June 16, 2017 – 3 bitcoins, each for 660 Euros

    Let’s assume that you have sold the two bitcoins from Purchase 1 first. The third bitcoin you sell is from Purchase 2. Now you can determine how long the bitcoins were in your possession. The two sold from purchase 1 have been in your possession for more than a year (April 5, 2016, to June 16, 2017). This sale is tax-free regardless of the income it generates. The other bitcoin was in your possession for less than a year (December 17, 2016, to June 16, 2017), so you will be taxed on the profit, provided it is higher than 600 Euros.

    Last-In-First-Out Method (LIFO)
    Until the tax treatment of bitcoins is finalised, you can also use the LIFO method as a second option. Here you do exactly the opposite of the FIFO method. In this method, you first sell those bitcoins you bought last.

    Depending on the individual case, both the FIFO and the LIFO method can have tax advantages. Please note, however, that once you have chosen a procedure, you can no longer change it: once FIFO, always FIFO.

    Tip:
    We recommend using the FIFO method. It also helps to keep a detailed record of your bitcoin purchases and sales so that you can respond to any inquiry from the tax office.

    How You Calculate the Yield

    You can easily calculate your income from bitcoin with the following formula:

    Selling Price – Acquisition Costs – Sales Promotion Costs = Income.

    Sales advertising costs can include dealer commissions. The return can be both a positive gain and a loss. Find out with our tax return calculator.

    Losses Reduce Taxes

    If you have made losses while trading cryptocurrency, you can use them to reduce your tax burden. However, losses incurred can also only be offset against profits incurred from private sales transactions in the respective calendar year. As a result, the overall profit from sales transactions decreases and, hence, your tax is lower.

    If you did not make any profits, you can carry forward your losses without limitation to future years and offset them against future profits.

    What Taxes Do I Consider?

    There are a few different taxes to keep in mind. You tax your profits with your personal income tax rate plus solidarity surcharge, and, if applicable, church tax need to be considered as this is a private sale.

    How Do I Enter Bitcoins in My Tax Return?

    With Taxfix, you can easily enter your income from bitcoin sales in your tax return. In the ‘Income’ section, indicate that you sold bitcoins in the respective tax year. In the follow-up questions, state how long you owned them and what price you bought and sold them. The Taxfix app explicitly requests all dates and prices so that the correct fields are entered in the tax forms.