In Part 1, the income tax treatment of “virtual currencies” and “mining” was presented as outlined in the draft BMF letter from 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 will be shown.
In a “fork,” a virtual currency is split into the existing version and an additional version. Holders of the existing virtual currency receive the same number of units of the new virtual currency – for no consideration.
The BMF draft already provides for the acquisition of the future units in the acquisition of the original virtual units. If a split then occurs, the acquisition costs of the original units are divided between the original and the new units at the market value at the time of the “fork”. If the new units are worthless at that moment, the acquisition costs remain with the original units. This means that any gain from the sale of the units is taxable as income from a private sale transaction, provided that the period between acquisition and sale does not exceed one year – or ten years if units are used as a source of income (Sec. 22 No. 2 in conjunction with Sec. 23 (1) No. 2 sentences 1 and 4 EStG).
According to the BMF draft, income from “lending” activities is to be taxable other income (Section 22 No. 3 EStG). If the lender receives income in the form of new units of a virtual currency, these are to be recognized at their market value at the time of receipt and the difference to a later sale proceeds is to be taxed as income from a private sale transaction, whereby the extension of the taxation period to ten years generally applies here, since the lender uses the virtual currency as a source of income (Section 22 No. 2 in conjunction with Section 23 (1) No. 2 Sentence 4 EStG).
The term “airdrop” refers to the “free” distribution of units of a virtual currency – mostly during marketing campaigns, when customers register on platforms for this purpose and disclose data about themselves.
In the view of the BMF draft, the provision of data that goes beyond general information constitutes a service by the taxpayer for which he receives units of a virtual currency as consideration. These units are to be recognized at their market value at the time of acquisition and are taxable as other services (Section 22 No. 3 EStG). If the units are subsequently sold, the gain from the sale is in turn taxable as income from a private sale transaction, provided that the period between acquisition and sale is less than one year – or 10 years if he used the units sold as a source of income – (Section 22 No. 2 in conjunction with Section 23 (1) No. 2 sentences 1 and 4 EStG).
The BMF draft considers remuneration with virtual currency to be a taxable other service (Section 22 No. 3 EStG). If these units are sold, a taxable private sale transaction is also assumed, whereby the 10-year period must generally be observed here as well (Section 22 No. 2 in conjunction with Section 23 (1) No. 2 Sentence 4 EStG).
“Initial Coin Offering (ICO).”
Initial coin offering (ICD) is the issuance of tokens in exchange for units of a virtual or government currency. Ultimately, capital is raised in this way – as in an IPO. The income tax classification of the proceeds depends on which rights and claims tokens convey in the individual case.
1. Utility token
“Utility tokens” convey future access to a product or service to the holder. If the token is redeemed at a later date, i.e. the product or service is acquired, this is irrelevant for income tax purposes according to the BMF draft, as there is no transfer for consideration to a third party, whereas the gain from the sale of tokens leads to income from private sales transactions (Section 22 No. 2 in conjunction with Section 23 (1) Sentence 1 No. 2 EStG) if the period between acquisition and sale does not exceed one year or 10 years.
2. Equity/Security/Debt Token
“Equity/Security/Debt Tokens” are comparable to conventional securities if they meet the requirement of the Securities Trading Act. If these are exchanged for units of a virtual currency, this constitutes a sale of the units given. Profits may be subject to taxation as private sales transactions. The BMF draft contains special tax regulations for tokens that represent a type of bond or that are provided to employees at a discount or free of charge.
As a result, it can be stated that the BMF draft attempts to include as many transactions with virtual currencies as possible for tax purposes. This is done primarily by allowing, in the case of virtual currencies and tokens that are held as private assets.