In Part 1, the income tax treatment of “virtual currencies” and “mining” was presented, as outlined in the draft of the BMF letter of June 17, 2021 (hereinafter “BMF draft”). In the following, the considerations of the BMF draft on the income tax treatment of further activities with virtual currencies and tokens in private assets are presented.
In a “fork”, a virtual currency is divided into the existing version and an additional version. Holders of the existing virtual currency will receive the same number of units of the new virtual currency – for no consideration.
The BMF draft provides for the acquisition of the future units when the original virtual units are acquired. If a split then occurs, the acquisition costs of the original shares are divided between the original and the new shares at the market value at the time of the “fork”. If the new units are worthless at this point in time, the acquisition costs remain with the original units. This means that every profit from the sale of the shares is taxable as income from a private sale transaction, provided that the period between acquisition and sale is one year – or 22 No. 2 in conjunction with Section 23 Paragraph 1 No. 2 Clause 1 and 4 EStG ).
Lending is the transfer of units of a virtual currency for use in return for payment, whereby additional units of a virtual currency are generated.
According to the BMF draft, income from “credit transactions” is taxable other income (Section 22 No. 3 EStG). If the lender receives income in the form of new shares of a virtual currency, these are to be recognized at the market value at the time of receipt and the difference to a later sale proceeds to be taxed as income from a private sale, whereby the tax period is generally extended to ten years, because the lender uses the virtual currency as a source of income (Section 22 No. 2 in conjunction with Section 23 Paragraph 1 No. 2 Sentence 4 EStG).
The term “airdrop” describes the “free” distribution of units of a virtual currency – mostly as part of marketing campaigns, when customers register on platforms for this purpose and disclose data about themselves.
According to the BMF draft, the provision of data that goes beyond general information represents a service by the taxpayer for which the latter receives units of a virtual currency in return. These shares are to be reported at their market value at the time of acquisition and, like other services, are taxable (Section 22 No. 3 EStG). If the units are subsequently sold, the capital gain is again taxable as income from a private sale transaction, provided that the period between acquisition and sale is less than a year – or 10 years if he has used the sold units as a source of income – (§ 22 No. 2 in conjunction with Section 23 Paragraph 1 No. 2 Clause 1 and 4 EStG).
In so-called “cold staking”, participants (“cold stakers”) are rewarded for holding units of a virtual currency over a longer period of time, for example to keep the value of a blockchain stable.
The BMF draft regards remuneration with virtual currency as a taxable other service (Section 22 No. 3 EStG). The sale of these shares is also assumed to be a taxable private sale transaction, whereby the 10-year period must also be observed in principle (Section 22 No. 2 in conjunction with Section 23 Paragraph 1 No. 2 Sentence 4 EStG).
“Initial Coin Offering (ICO).”
Initial Coin Offering (ICD) is the issue of tokens in exchange for units of a virtual or state currency. Ultimately, this is how – as with an IPO – capital is raised. The income tax classification of the proceeds depends on which rights and claims tokens are transferred in the individual case.
1. Utility token
“Utility tokens” give the owner future access to a product or service. If the token is redeemed at a later point in time, i.e. the product or service is acquired, according to the BMF draft, this is irrelevant in terms of income tax law, since there is no transfer to a third party in return for payment, while the profit from the sale of tokens leads to income from private sales transactions ( Section 22 No. 2 in conjunction with Section 23 Paragraph 1 Clause 1 No. 2 EStG) if the period between acquisition and sale does not exceed one year or 10 years.
2. Equity / Collateral / Debt Tokens
“Equity / Security / Debt Tokens” are comparable to conventional securities if they meet the requirements of the Securities Trading Act. If these are exchanged for shares in a virtual currency, the shares issued have been sold. Profits as private sales transactions can be subject to taxation. The BMF draft contains special tax regulations for tokens that represent a type of bond or are made available to employees at a reduced rate or free of charge.
As a result, it can be stated that the BMF draft tries to take into account as many transactions with virtual currencies as possible for tax purposes. This is done primarily through the admission of virtual currencies and tokens that are held in private assets.