From a tax point of view, bitcoins and other cryptocurrencies are not a currency or capital gains, but private sales transactions. In this article, we explain how and when income from cryptocurrencies is taxed and how you can easily declare it in the Taxfix app.
How are cryptocurrencies treated for tax purposes?
In Germany, all cryptocurrencies are treated the same for tax purposes. Their sale is a private sale transaction - profits from Bitcoins, Ethereum, Ripple and Co. are therefore considered differently than income from shares, investments or other financial transactions.
From the point of view of the tax authorities, the income resulting from trading in cryptocurrencies is therefore comparable to gains from the sale of 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 are cryptocurrencies tax-free?
Two values are important for the taxation of cryptocurrencies:
The profit you have made from the sale of Bitcoins and Co.
The period of time you have held them - the so-called holding period
The following applies:
If you have held the Bitcoins for more than one year, the profit is tax-free and you do not have to declare it in your tax return. The amount of the gain is irrelevant.
If you have sold the Bitcoins within twelve months after the purchase, the profits are tax-free up to a limit of 600 euros. If your profit was higher than 600 euros, you have to pay tax on it in full and declare it in your tax return. Your individual income tax rate applies to the taxation. If your profit was 600 euros or less, you do not have to declare it in your tax return.
The 600-euro limit does not only apply to cryptocurrencies, but also to all other private sales transactions within a year. For example, if you sell a painting within a year at a profit of 700 euros, you have already exceeded the entire exemption limit. If you also had a profit of 100 euros from bitcoin sales, you also have to pay tax on this.
How do I calculate the holding period of the cryptocurrency?
Whether you have to pay tax on your profits depends largely on how long you have held the cryptocurrency. Determining this holding period can be complicated. We would therefore like to explain the two common methods in an easy-to-understand way.
Holding period of cryptocurrencies: The FIFO method
If you buy and sell Bitcoins frequently, it can be difficult to determine the exact holding period in order to pay tax on the Bitcoins. After all, it is almost impossible to assign the purchase or sale date to each individual part of the cryptocurrencies.
However, to make taxation possible and to include the income from your sales in your tax return, you can use the FIFO method (first-in-first-out). With this method, the principle applies that you first sell the cryptocurrency that you acquired first.
An example of the calculation with fictitious values:
Your purchase 1: 5 April 2019 - 2 Bitcoins - per piece 233.90 euros
Your purchase 2: 17 December 2019 - 2 Bitcoins - per piece 421.87 euros
Now check when you sold Bitcoins:
Sale: 16 June 2020 - 3 Bitcoins - per piece 660 Euro
According to the FIFO method, you first sold the two bitcoins from purchase 1. You also sold one bitcoin from purchase 2. Now you can determine how long the 3 sold Bitcoins were in your possession.
The two sold bitcoins from purchase 1 were in your possession for more than one year (5 April 2019 to 16 June 2020). This sale is therefore tax-free regardless of the proceeds.
The other bitcoin was in your possession for less than a year (17 December 2019 to 16 June 2020), so you would have to pay tax on the profit - but only if you made more than 600 euros in profit. In our example, it was less than 600 euros, so taxation is not necessary.
Holding period of cryptocurrencies: The LIFO method
In addition to the FIFO method, you can also use the LIFO method (last-in-first-out). Here you proceed in exactly the opposite way. It is assumed that you first sell the bitcoins you bought last.
Depending on the individual case, the FIFO or LIFO method has tax advantages. Note, however, that once you have chosen a method, you can no longer change it.
So: once FIFO, always FIFO.
The FIFO method is more common because it allows you to sell old Bitcoin holdings after the holding period has expired, even if you have bought more Bitcoins in the last 12 months before the sale. This also applies to other cryptocurrencies. Accordingly, you should keep precise records of your purchases in order to be able to react accordingly in the event of enquiries from the tax authorities.
How do I calculate the income from trading cryptocurrencies?
After you have determined the holding period of your cryptocurrencies, you can easily calculate the return. To do this, you need the purchase price, the sales price and possible sales promotion costs. Simply subtract the purchase price and advertising costs from the sales price:
(Sales price) - (purchase price) - (sales promotion costs) = revenue
Sales promotion costs can be, for example, dealer commissions. The revenue can be both a positive profit and a loss.
How is the exchange of different cryptocurrencies treated?
Exchanging different cryptocurrencies is considered a sale and purchase and is treated accordingly for tax purposes. So if you exchange cryptocurrency A for cryptocurrency B, this is considered a sale of cryptocurrency A and a purchase of cryptocurrency B. So in this case, too, the holding period and the amount of return have to be determined.
I made a loss on the trade, what do I do?
Losses can reduce your tax burden if you can offset them against gains from other private sales transactions in the same tax year. This reduces your overall gains and your tax bill.
If you have only made losses, there is a loss carryforward that you can offset against future profits in your next tax return. We will explain how you can record your losses from cryptocurrencies in the Taxfix app in the next point.
How do I declare my income from cryptocurrencies in the Taxfix app?
You can declare income from the sale of Bitcoins or other cryptocurrencies in our app in the "Income" category.
You can either record your transactions individually or simply enter your profit or loss as a total amount for the year. Finally, you can enter any other costs you incurred in connection with the sale (e.g. trader commissions).
For individual entry, you follow the questions and enter the date and amount of the purchase and sale. Based on this key data, our app automatically determines the amount of revenue (profit or loss).
When entering the total amount, simply enter the value of your profit or loss. Please note that the loss is also entered here as a positive value.