In March this year, Germany's Federal Ministry of Finance published a circular which should interest anyone with crypto currencies. It updated the circular on the income-tax treatment of virtual currencies and other tokens of 10 May 2022. It not only offers improvements in terminology and technological explanatory notes on crypto-assets, the Federal Ministry of Finance circular also introduces key substantive legal aspects along with stricter reporting and verification requirements.
Taking into account the further development of regulatory terminology, the title now contains the term "crypto assets", replacing "virtual currencies and other tokens".
In July 2022, the Federal Ministry of Finance sent a draft supplement to the Federal Ministry of Finance circular of 10 May 2022 to associations and selected consulting firms. The supplementary circular contained statements on tax declaration, co-operation and record-keeping duties connected to crypto assets. An updated version of the draft was last published in March 2024. The explanations it contains have now been largely incorporated into the revised Federal Ministry of Finance circular. For the first time, they set out which declaration and documentation obligations the tax authorities require from crypto investors. However, the new publication also contains a few surprises, raising new questions.
Specification of tax return, cooperation and record-keeping obligations
The taxpayer must declare transactions carried out both on public blockchains and on Centralised Exchanges (CEX). The circular addresses the common use of tax software such as Blockpit or CoinTracking in practice. It also states that, in addition to one's own records, tax reports generated by such software can also be used as a basis for the assessment. However, this assumes that the reports are complete, plausible and consistent. In other words, they do not contain any missing acquisition data, negative balances or unexplained cash inflows and outflows. In addition, explanatory notes on the selected report settings (e.g. consumption sequence and price determination) and the underlying tax valuations must be included. Adjustments and corrections must be identified, e.g. in a letter accompanying the tax return.
To verify the declared information, tax offices can request the raw data used to create the report or request screenshots or further information on certain transactions from taxpayers in addition to independent investigative measures (e.g. research in a Block Explorer). The latter has long been observed in practice, particularly in the context of external audits and criminal tax investigations.
The responsibility for the technically and legally demanding task of processing transaction data for tax purposes is therefore largely assigned to the taxpayer. This is to be viewed critically insofar as the statutory duties of co-operation in private assets do not generally provide for any such recording and disclosure obligations. As a result, crypto-assets are subject to distinct and particularly stringent cooperation obligations, which, according to the application guidelines of the revised Federal Ministry of Finance circular, must be met from the 2025 assessment period onwards. The Federal Ministry of Finance justifies the far-reaching compliance obligations not only with the taxpayer's 'proximity' to the evidence but also with expanded cooperation duties in cross-border matters, which are deemed to apply when using foreign and decentralized trading platforms. In these cases, according to the Federal Ministry of Finance, the taxpayer is responsible for ensuring that the data necessary for determining taxable income is obtained (e.g. by regularly backing up transaction data). Loss of data, e.g. due to insolvency of the trading platform or hacker attacks, should be assessed against the taxpayer. The same is likely to apply if the foreign trading platform does not (or no longer) provide the required transaction data. If the tax office is unable to determine the basis of assessment due to incomplete data, it should be authorised to make an estimate. However, such a sanction must not constitute a penalty and must be based on the most likely scenario. When choosing a trading platform, crypto investors will therefore have to consider not only economic aspects but also data documentation options and regularly retrieve and store transaction data. At best, real-time import of transaction data into tax software is ensured by means of an API connection to the trading platform.
The crypto-specific documentation requirements are flanked by the generalPrinciples for the Proper Management and Storage of Books, Records and Documents in Electronic Form and Data Access[GoBD]). From this, the Federal Ministry of Finance also derived the requirement for procedural documentation for the use of special software tools. Additionally, crypto transactions must be recorded individually, completely, correctly, in a timely and organised manner in the accounting system, which in practice can be a challenge that should not be underestimated due to the lack of sophisticated software solutions for business assets.
As a result, the Federal Ministry of Finance circular largely describes the practice developed in recent years for declaring income in connection with crypto assets. This is to be welcomed in principle and gives rise to the hope that nationwide attempts at clarification in the form of extensive, undifferentiated questionnaires, as was the case in the past, will no longer have to be expected on presentation of a clean income determination. However, the fact that taxpayers will face major (sometimes costly) challenges in meeting the necessary reporting and verification obligations due to the lack of sophisticated specialised software and the technical complexity of the system must still be viewed critically.
For the taxpayer, the choice between private and business assets therefore affects not only the specific tax consequences, but also the relevant reporting obligations, as the reporting requirements for business assets are significantly more complex and invasive. A conscious decision should be made as to whether the investment in crypto assets should be made commercially or as private assets.
Read Part II of our article here, featuring insights on the revision of the explanatory notes on crypto-related issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
