Bitcoin, Ethereum, Ripple and Co. are an exciting investment for many. If you make a profit by trading crypto currencies, the tax office may want to collect a part of it. That’s why it’s important that you include your trades with cryptocurrencies in your tax return. You can find out when this is necessary and how to do it here.
Topics in this article
- When do taxes on cryptocurrencies apply?
- Where do I enter Bitcoin and Co. in the tax return?
- What are the taxes on my winnings?
When do taxes on cryptocurrencies apply?
The short answer: Very rarely in private trade. The long answer: There are two factors that determine whether taxes apply to exchanging or selling cryptocurrencies. One is the so-called holding period of your Bitcoins and Co. So the period of time over which the cryptocurrency is in your possession. The other is the amount of your profit when trading.
On the holding period: If you keep a cryptocurrency for more than 12 months, the profits from the sale or exchange are tax-free and the trade does not have to go to the tax return. Sounds simple at first. However, it can get complicated if you trade a particular cryptocurrency more often. Then there are sometimes more and sometimes fewer coins in the one depot. So how are you supposed to determine the holding period for exactly the coins you sold at any given time?
As a rule, you use the Fifo method for this: The abbreviation means “first in, first out”. The tax office assumes that you will be the first to sell the coins purchased first. With each sale, you hand over the coins that have been in your custody account the longest. However, it is best to ask your tax office in advance whether it also uses this method.
From Fifo to Lifo and Hifo – how the holding period for crypto currencies can still be determinedFrom Fifo to Lifo and Hifo – how the holding period for crypto currencies can still be determined
As an alternative to Fifo, there is also the Lifo method: Last in, first out. It is assumed that the last purchased will be sold again first. In addition, there are Hifo (Highest in, first out) and Lofo (Lowest in, first out). These procedures assume that the copies that you have bought at the most expensive or cheapest rate are the first to be sold again. However, the last two methods Hifo and Lofo are rarely used.
On the amount of the profit: If the holding period is shorter than one year, you pay taxes on the entire amount for winnings over 600 euros. If you have also made losses with crypto trading in the same year, simply subtract them from the profits. After all, if you make a profit of 601 euros, for example, you must also pay tax on the full 601 euros. The exemption limit is then completely eliminated.
The catch: Not only the trading of crypto currencies is relevant for the 600-euro limit. Income from other so-called private sales is also included here. This includes, for example, if you buy a piece of jewelry, a car or a coin collection within a year and sell it again at a profit.
Please note: The necessary holding period for tax-free trading is not the same for all transactions with crypto currencies. For example, if you lend a cryptocurrency (so-called lending) and receive interest on it, the period is extended to ten years. Only then can you sell the corresponding coins tax-free.
© istock/RichVintage/2019 Profits and losses from crypto trading must be included in the tax return.Important: Always state relevant profits from private sales
Anyone who does not declare their profits from private sales or in too little amounts can be guilty of tax evasion under certain circumstances. In the worst case, this even threatens a prison sentence. Therefore, all profits from trading in crypto currencies during the year must be included in the tax return so that the tax office can check them. Where do I enter Bitcoin and Co. in the tax return?
Trading in cryptocurrencies belongs in the tax return in the investment for other income (SO). There you list all relevant private sales. Either directly in the form or – in the case of several items – in a separate list. To do this, enter the time of purchase and sale. You also specify the selling price, acquisition cost and profit. The following applies: The profit is equal to the selling price minus the acquisition costs. The winnings must be expressed in euros, in the case of a payment in foreign currency, the exchange rate at the time when the sale amount has been credited.
Tip: Does your cryptocurrency merchant charge a fee per transaction? Then you can specify the fee at this point of the tax return as advertising costs and deduct it from the profit.
Initially, you do not need proof of your transactions with crypto currencies for the tax return. However, you should definitely have a list of your transactions ready, including quantity, rates, fees and date. Under certain circumstances, the tax office may require the documents after reviewing the tax return. Cryptocurrencies tax simply explained
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© Lohnsteuerhilfeverein Vereinigte Lohnsteuerhilfe e.V. Losses reduce profits not only in the current tax year
You haven’t had a good year and have made more losses than profits from trading cryptocurrencies? Then you can use them in the tax return to your advantage. Profits can be offset against losses from the previous year or the following year. This is called loss carry-forward or loss carry-back.
An example: In 2019, the sales of cryptocurrencies have led to a loss of 200 euros on your private sales. For example, because you sold coins at a lower price than you bought them. In 2020, on the other hand, you were able to make a profit of 750 euros. This means that you are above the limit of 600 euros for 2020 and would have to pay taxes on the entire 750 euros. However, you can save yourself these taxes. Because a loss carry-forward allows the loss from 2019 to be offset against the profit from 2020. This means:
750 euros profit from 2020 minus 200 euros loss from 2019 result in 550 euros profit for 2020. This brings you back below the tax-free 600-euro limit.
It works the other way around in a similar way. If you have high losses in a year, you can offset them against profits from a previous year. This is the loss carry-back, in which you receive back taxes already paid accordingly. What are the taxes on my winnings?
If you have to pay tax on your profits, this is done as with your other income with your personal tax rate. How this is determined is explained in our article “Tax progression explained very easily.” In addition to the wage tax, solidarity surcharge and possibly church tax are also due.
At a glance: Avoid crypto taxesAt a glance: Avoid crypto taxes
Here are the points with which you can prevent the tax office from asking you to pay for trading crypto currencies:
- Wait for hold period: Keep the cryptocurrency for more than a year. After that, the profits from the sale are usually tax-free.
- Limit profits: Postpone transactions from other private disposals if this will bring your profits in the current year over the 600-euro limit.
- Offset losses: With the loss carry-forward or loss carry-back, you can offset losses from one tax year against the profits from another year.
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