After a long wait, the Federal Ministry of Finance (BMF) has published a draft letter on the taxation of crypto currencies, which for the first time also comments on the taxation of income from Proof of Stake (PoS). In view of the many open tax questions, the 24-page letter deals with many aspects that were already known from administrative practice. Nevertheless, there is still plenty of material for discussion.
The tax attorney Anka Hakert has been dealing with tax issues relating to cryptocurrencies since 2013 and advises private investors as well as companies.
One remark right from the start: The letter is only binding for the tax authorities, but not for the courts. The tax courts may and often do differently. Taxpayers, however, have to disclose all facts that could be tax-relevant to the tax office, regardless of their own legal opinion, in order not to expose themselves to the accusation of tax evasion. Then you can argue, if necessary in court. After all, taxpayers now get an idea of which basic rules the tax office will follow in the future and can – at least to a certain extent – prepare for them.
What is staking?
PoS is a term for an alternative consensus procedure for cryptocurrencies: Instead of having hash values calculated as in a proof-of-work computer, the right to enter a new block is distributed via the use of cryptocurrencies. One possible method for PoS is that the stakers deposit cryptocurrencies in a blockchain contract in which it is then frozen for a longer period of time. The block right is distributed among the stakers via random procedures, whereby the size of the stake also increases the chances. Whoever gets a move can reap the reward for the respective block as well as the fees for the transactions included. Among other things, the second largest crypto currency Ethereum wants to switch to a PoS procedure this year.
In principle, (almost) everything is controversial when it comes to taxation in connection with staking. The publication of a letter from the Federal Ministry of Finance, which also deals with this topic, was all the more important. The statements on this will probably have a rather negative impact on the staking market in Germany.
Staker rewards and transaction fees in personal wealth
According to the BMF, the receipt of cryptocurrencies by way of the proof of stake leads to taxable income from other services according to § 22 No. 3 EStGif there is no commercial activity. This is based on the broad interpretation of this regulation, both with regard to the term “performance” and the lack of a contractually stipulated reciprocal relationship between performance and consideration. Not only the staker who performs the validation himself, but also the staker who simply locks his cryptocurrencies earns income from other services.
This is in line with mining in the private sector, where the BMF also accepts taxable income from other services. The BMF explicitly does not differentiate between block rewards and transaction fees, so that the receipt of the reward, which is dependent on a random element, would also be controllable. This view was also taken earlier by the tax authorities, but has always been controversial.
Sell the staking reward
However, the BMF goes one step further and says that the units of a virtual currency obtained through mining or staking are consequently considered to be “acquired” (exchange-like process). A subsequent sale of the staking reward within the speculation period of Section 23 EStG would therefore be taxable in principle.
The concept of acquisition is interpreted very broadly by the BMF, one could also say too broadly. In the past there have been reports from the authorities that there is no acquisition process in private mining, i.e. no purchase against payment. Most of the literature also takes this view.
According to the Federal Fiscal Court, when calculating the income from other services, the exploited cryptocurrencies would be set at the market rate at the time of receipt, i.e. the acquisition. At the same time, this would be the purchase price, which is the basis for calculating the capital gain in the event of a later sale.
Probably the most important question in this context for most stakers at the moment concerns the question of the length of the speculation period. And here’s a bitter pill for anyone interested in staking.
Speculation period of ten years
When selling previously purchased cryptocurrencies, a speculation period of one year applies, after which sales are tax-free. It has been hotly debated from the outset whether a longer speculation period of ten years will apply to the sale of cryptocurrencies if they were previously used for staking. The background to this is that the so-called speculation period (sale period) for assets increases to ten years if they are used as a source of income for at least one calendar year (Section 23 (1) no.2 sentence 4 EStG).
According to the BMF, the ten-year period applies not only to lending for a fee, but also to staking if the holding of cryptocurrencies leads to the allocation of additional units. This should apply both to game types such as cold staking or staking in connection with the operation of a masternode – and expressly also when holding a crypto currency means that the participant is allowed to create the next block and only then generates additional units.
Cases are already known from practice in which the tax authorities have applied the longer period and, according to some pronouncements, there were fears that this view might prevail. However, this is still a point from which, after a detailed examination by the highest tax authorities, one would have wished for a different result.
Trying out also increases the holding period
If the BMF sticks to this view, it will have a significant impact on the decision of many investors whether to use their coins for staking. And at a time when staking has never been easier. For example, numerous crypto exchanges offer corresponding services. Anyone who is considering trying this should be aware of the consequences by now at the latest.
As the BMF explains, the duration and frequency of the service are irrelevant for the acceptance of income from other services. The regulation on the speculation period does not require use to generate income over 10 years; income only needs to have been generated in at least one calendar year. Even an occasional or even one-off service is covered by the wording of the provision.
Any additional declaration required
In summary: According to the Ministry of Finance, cryptocoins used for staking can only be sold tax-free ten years after purchase. This also applies to coins taken in staking if they are used for staking on the staking account. Users who have used their coins for staking should immediately check whether and how the income from both staking and a subsequent sale has already been stated in a tax return, in order to make a subsequent return or correction if necessary. Since a subsequent declaration must be complete, it is recommended that you do this with a qualified tax advisor and / or tax attorney.
It is doubtful whether this application of this legal regulation will continue in view of the far-reaching consequences and the already existing criticism before the tax courts. It is to be expected that sooner or later the legal question will be presented to the Federal Fiscal Court. However, it will take a long time for the Federal Fiscal Court to make a decision, while the user concerned will have to keep the tax assessment open in order not to suffer a loss of rights.