Crypto trading in Germany – is a wave of criminal tax convictions rolling in?

October 2023 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

October 2023 Issue

Cryptocurrencies – digital payment instruments distributed via the internet, independent of a central bank and based on algorithms – have generated considerable profits for investors in recent years. The most popular cryptocurrencies currently include Bitcoin, Ether and Monero. Trading takes place on crypto exchanges, such as bitstamp.net and bitcoin.de.

On 14 February 2023, the highest German fiscal court (Bundesfinanzhof) decided that crypto trading profits are taxable under German income tax law. Prior to the judgment, there was no unanimous consensus across the fiscal courts and legal literature. However, with the backing of Germany’s highest fiscal court, the tax authorities are now taking action.

According to recent reports, tax investigators from the German state of North-Rhine Westphalia had already been collecting data from around 4000 people who earnt more than €50,000 in revenue through crypto trading on bitcoin.de between 2015 and 2017. The investigators suspected tax evasion in the tens of millions of euros.

Investigations by tax authorities should never be underestimated. However, it remains to be seen whether they will result in a surge of criminal tax convictions.

Tax law

According to the Bundesfinanzhof, profits generated from selling or exchanging cryptocurrencies are taxable under section 23 of the German Income Tax Act – Einkommensteuergesetz (EStG) – if they were sold or exchanged within a one-year period after the initial acquisition, and if the total profits exceed €600 within a calendar year. Otherwise, the profits remain tax free.

However, the profits from selling or exchanging cryptocurrencies may not be tax free until 10 years after the initial acquisition, if the crypto coins are used to generate income in the meantime, for example by lending them to others or making them available to the crypto network for the verification of transactions, which is known as staking.

The taxable profit is determined by the difference between the acquisition price and the selling price of the cryptocurrencies. If crypto coins of one type are purchased at different times and prices, the profit calculation assumes that the ones purchased first were the first to be resold.

Criminal law

Taxable crypto profits must be declared in full and in the correct amount in personal income tax returns. If this is not complied with, allegations of intentional or reckless tax evasion could be brought up. Intentional tax evasion can be punished by imprisonment of up to five years or a fine, and reckless tax evasion by a fine of up to €50,000.

Since investigators have already collected data from a German crypto exchange there is a risk of exposure and a will to go after allegedly dishonest crypto investors. Furthermore, requests for data to foreign crypto exchanges are also possible by way of mutual legal assistance. It should therefore be technically possible for investigators to trace individual transaction history.

Investigators can start criminal proceedings five years after the offence and must conclude them within 10 years of the offence. However, due to changes in the law in 2020, in cases where the non-declared taxes exceed €50,000, investigators have 15 years to initiate investigations and must conclude them in 37.5 years.

However, not every investor who has not declared crypto trading profits is an intentional or reckless tax evader. Even though investigators might argue that the subject had been discussed in the media and crypto forums, and was therefore known to investors, several circumstances could indicate that investors may not have intentionally or recklessly evaded taxes.

Declaration errors could occur against the background that the investors were not aware of a tax liability before the recent judgment of the Bundesfinanzhof. This is supported by the fact that crypto trading is a new and complex phenomenon. It is counterintuitive to suspect that profits from cryptocurrency exchanges are taxable due to the lack of cash flow.

Furthermore, the legal landscape around cryptocurrency has been hotly disputed in legal literature in recent years. Also, in 2020, the Nuremberg Fiscal Court emphasised the fact that the tax liability for crypto profits has not yet been the subject of a Supreme Court decision. In this respect, one must ask why a layperson should have seen the situation clearer than professional jurists.

Defence options

German criminal tax law provides for the possibility of obtaining impunity by making corrections after the offence has been committed. Therefore, investors who have not declared crypto profits so far can file a subsequent tax return to avoid repercussions. For this purpose, the crypto profits from at least the last 10 years must be declared.

Accordingly, it is necessary to carefully document all crypto transactions, and an estimate is only permissible within extremely narrow limits. With many transactions, retrospective reconstruction is a challenge. Therefore, a comprehensive list of crypto exchanges must be carefully maintained.

However, this is only possible once the alleged offence has been uncovered by investigators and the investor would have to reckon with its discovery. In the event the tax authorities have already received and evaluated data from the crypto exchange used by the investor, the offence could be regarded as uncovered.

If criminal proceedings have already been announced to the investor, it is necessary to defend oneself. A defence against the tax liability as a whole is no longer possible after the ruling of the Bundesfinanzhof. Only the amount of the taxable profits in individual cases may be up for discussion with the tax authorities.

The main defence argument would be around lack of knowledge of any tax liability. Small investors with only a few transactions will have a better chance of convincing the tax authorities of unintentional non-declaration of crypto profits compared to experienced investors with many transactions in various cryptocurrencies.

However, not every criminal tax case ends with an indictment and a guilty verdict. Many criminal tax proceedings can be settled by agreement with the tax authorities against payment of a fine without a declaration of guilt nor entry in the criminal register. In general, this requires the payment of the outstanding tax and full cooperation with the tax authorities.

Prospects

Tax investigators have just started their search for non-declared profits originating from crypto trading. In view of the enormous profits generated in recent years, the tax authorities are likely to be in this for the long run. Therefore, investors should properly declare future profits in their tax returns. From now on, investors should be aware of the tax implications for crypto coins.

Previous non-declared profits should be post-declared. If criminal proceedings have already been initiated, a mutually agreeable solution must be worked out with the tax authorities. Investors that have not had tax issues in the past can hope for more tolerant treatment by the tax authorities, especially if the non-declared profits do not exceed €50,000.

The issue should not be taken lightly. However, a wave of criminal tax convictions is not to be expected at present.

Dr Moritz Lange is a partner and Dr Dominic Reitner is an associate at Feigen Graf. Dr Lange can be contacted on +49 (0)69 7701 9613 or by email: lange@feigen-graf.de. Dr Reitner can be contacted on +49 (0)69 7701 9624 or by email: reitner@feigen-graf.de.

Moritz Lange and Dominic Reitner

Feigen Graf