08.03.2023Federal tax court confirms income tax treatment of cryptocurrency transactions
Federal tax court in a long awaited decision confirms government position on taxing cryptocurrency gains as taxable income.
In a long-awaited decision dated 14 February 2023, which was published on 28 February 2023, Germany’s federal tax court (BFH) ruled that capital gains from the sale of cryptocurrencies are taxable as “other income” under section 23 (1) no. 2 of the income tax code (ITC). The BFH’s decision upheld the tax authority’s view, as well as the decisions of the lower tax court of Cologne dated 25 November 2021 (see GTLN dated 09 May 2022) and the lower tax court of Baden-Wuerttemberg dated 11 June 2021 (see GTLN dated 16 February 2022). The decision also is in line with the Ministry of Finance’s final decree dated 11 May 2022 on the tax treatment of virtual currencies and tokens (see GTLN dated 18 May 2022).
In the case decided by the BFH, the taxpayer argued that capital gains from the sale of cryptocurrencies are not subject to income taxation since cryptocurrencies are not assets for purposes of the “other income” provision of section 23 (1) no. 2 ITC. The taxpayer further argued that due to a general lack of enforcement by the tax authorities regarding the taxation of cryptocurrency gains, the constitutional principle of tax certainty would be violated if such gains are taxed.
The BFH rejected the taxpayer’s arguments and upheld the view of the tax authorities, lower courts, and Minister of Finance. Furthermore, the BFH specifically rejected the argument that a violation of constitutional principles occurred. The BFH disagreed that there is a general lack of enforcement if the tax authorities do not have the ability to enforce a provision in the tax law. The BFH noted that the tax authorities possibly could issue collective information requests to the operators of trading platforms. The BFH, in this regard, highlighted the initiatives of the OECD to create a uniform framework for the automatic exchange of tax-relevant information on crypto assets (CARF). The BFH also highlighted that the tax authorities must be granted a certain transition period for the introduction of new and additional control mechanisms and that a reasonable timeframe for doing so has not yet been exceeded. The hope of tax practitioners that this issue would be referred to the Federal Constitutional Court for clarification on the lack of enforcement in regard to the principle of tax certainty was not fulfilled.
The decision of the BFH has put an end to this controversial matter between taxpayers and the tax authorities, by upholding the view of the tax authorities. Affected taxpayers should review their filing requirements and documentation with regard to their cryptocurreny transactions.
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Andreas Maywald
Client Service Executive | ICE - German Tax Desk
