Bitcoin and Tax: Cryptocurrencies in Your Tax Return
Bitcoin and taxes – How the blockchain-based currency is taxed
In this video we explain the basics of the cryptocurrency Bitcoin, the encryption, how it works on the basis of the blockchain, and if you can already use it as payment:
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How are Bitcoin and other cryptocurrencies taxed?
The COVID-19 pandemic has made alternative investment products more popular than ever and many investors continue to strive for high profits. As a result, cryptocurrencies such as Bitcoin are in focus again. In Germany, they are treated differently from a tax perspective than income from shares, investments or other financial transactions.
From the point of view of the tax office, the earnings from trading Bitcoins, Ethereum, Ripple and Co. are comparable to profits from works of art or other valuables. This has the positive effect that profits from the sale of such digital currencies can be tax-free.
When is Bitcoin tax-free?
Two values are important when it comes to taxation of Bitcoin:
- The income or profit generated from the sale of your Bitcoins and co.
- The duration of ownership of cryptocurrency
The following applies:
If you have owned bitcoins for more than a year, the sale is tax-free. The value of the profit doesn’t matter and you don’t have to declare it in your tax return. An exception to this rule is if you have used your cryptocurrency as a source of income (e.g. through mining). In this case, the period is extended to 10 years.
If you have sold the bitcoins within twelve months of the purchase, profits are tax-free up to an exemption limit of 600 euros. From 600 euros onwards, the profit must be taxed in full. If your profit is even one euro higher, you are obligated to pay tax on the entire profit.
The 600 euro limit applies not only to Bitcoin, but also to other cryptocurrencies and all other private sales transactions within a year. For example, if you sell a painting within a year with a profit of 700 euros, you have already exceeded the entire exemption limit. In this case, the profit from your Bitcoin sales is irrelevant.
Taxing Bitcoin: Problems with the LIFO method to determine the holding period
If you buy and sell bitcoins more frequently, it can be difficult to determine the exact holding period in order to tax the bitcoin. Normally, an individual assignment must be made and, if necessary, the continued purchase prices must be calculated. If the prices cannot be determined, the average value can be used. However, this involves an enormous amount of effort. After all, it is almost impossible to assign the purchase or sale date to every single piece of cryptocurrency.
To still be able to tax the Bitcoin and include the income from your sales in your tax return, you can use the FIFO method (first-in-first-out). Many tax offices accept this method for convenience. By following this method, you first sell those cryptocurrencies that you bought first.
Your 1st purchase (Purchase 1): April 5, 2019 – 2 Bitcoins – 233.90 euros each
Your 2nd purchase (Purchase 2): December 17, 2019 – 2 Bitcoin – each 421.87 euros
Now check when you sold the Bitcoins.
Sale: June 16, 2020 – 3 Bitcoins – 660 euros each
Calculate the yield from Bitcoin and Co
The taxation of Bitcoins isn’t completely clear. In addition to the FIFO method, some investors also use the LIFO method (last-in-first-out). Here you do exactly the opposite of FIFO. It is assumed that you sell the bitcoins that you bought last first.
The advantages of the FIFO or LIFO method depend on the individual case. In many cases, however, the LIFO method is not accepted by the tax authorities!
Please also note that you cannot switch cryptocurrency taxation methods once you have chosen one. The selected method applies to each wallet and can only be reselected after a complete sale of all units in the wallet.
You have owned the two Bitcoins sold from Purchase 1 for more than a year (April 5, 2019 to June 16, 2020). This sale is tax-free regardless of the proceeds.
The other Bitcoin was in your possession for less than a year (December 17, 2019 to June 16, 2020), so you would have to pay tax on the profit, only if you made a profit of more than 600 euros.
Calculating Cryptocurrency Yields:
Selling Price – Acquisition Cost – Sales Promotion Cost = Revenue.
Sales promotion costs can be dealer commissions, for example. The return can be both a positive gain and a loss.
Entering bitcoins into the Taxfix app
When you choose your favorite tax tool, make sure it’s capable of deducting your cryptocurrencies. Not all the services offer this! With Taxfix it’s easy to add your results from Bitcoin sales (or other crypto) to your tax return.
In the chapter “Income” you can confirm that you sold Bitcoin in the respective year. The following questions will clarify how long you owned them. Also, they’ll clarify at which price you bought and sold them. All prices and dates of the transactions will be analysed specifically, and you are asked which additional costs you may have had when you sold them. Taxfix enters this information into the correct fields in the tax forms for you.
If you made a loss, this minimizes your tax burden. Please keep in mind that the losses are only being offset against private capital gains (“private Veräußerungsgeschäfte”) in the respective year. This brings down the capital gains and your tax result is improved.
In case you didn’t have any capital gains, the tax office will automatically transfer your loss to the next year(s) and offset them against future gains.
This is how it looks within Taxfix:
Tax investigation for cryptocurrencies like Bitcoin
The taxation of cryptocurrencies has been discussed in specialist circles for some time along with the traceability of income from purchases and sales. There’s plenty of ongoing research at the European and German level to better record the transactions of people who trade in cryptocurrencies. For example, the obligation to provide certain information will be extended to all providers of financial services operating in the EU.
The Taxfix tax calculator gives you an impression of the tax refund you can expect from the tax office. It’s free and barely takes a few minutes to answer the simple questions.
You don’t enter your Bitcoin information in this tax calculator. Instead, you fill it in after clicking ‘Try it now’ in Taxfix’s complete question flow. The calculation of your profits and losses from cryptocurrency sales are in good hands.