by Liam J Kelly
In yet another forward-thinking maneuver, the German Federal Ministry of Finance has released a report on Tuesday, February 27, outlining taxable events regarding bitcoin payments. Specifically, the financial authority looked into how to tax miners, cryptocurrency transactions, and the taxable role that exchanges play in the ecosystem. Whatsmore, the document based these statements on the contents of the European Union’s VAT directive.
Integrating Virtual Currencies with Existing Infrastructure
One of the more intriguing features of the document revolves around its reference to existing financial legislation. While Germany itself is turning into somewhat of a hotspot for crypto startups and pundits, by including EU-wide regulations, it offers an optimistic perspective for the rest of the union. The document reads, as translated by the author:
“Regarding payment in Bitcoin, the fee for the service provider is determined by the equivalent value in the currency of the member state in which the service is provided and at the time when this service is performed. The conversion [from bitcoin to fiat] shall be carried out at the latest published selling price in conjunction with article 91 paragraph 2 of the VAT Directive.”
To what extent this has already urged other member states to consider reevaluating their stance on the subject is still to be determined. At current, however, France is wrangling with how best to real in the growing market, Switzerland is redefining itself as a haven for crypto businesses and is in the midst of offering Ethereum-based identities for citizens of Zug.
— World Economic Forum (@wef) September 4, 2017
Despite the uncertainty, one thing is clear; many officials are aware of the need for a common communal response to a borderless payment system.
Germany in Opposition to the United States
The new ruling also opposes contentious regulatory positions made by the United States. While the German document opens with, “The use of Bitcoin shall be equated with the use of conventional payment instruments, insofar as they serve no purpose other than that of a pure payment instrument,” the US treats the pioneer cryptocurrency as property as far as taxation goes. Such a label puts any transaction, even those made to buy groceries, a tank of gas for your car, or a pizza, would be considered a taxable event with both parties held responsible for reporting any capital gains.
But take heed, the use of bitcoin for day-to-day payments in Germany must be used as “a pure payment instrument,” rather than a speculative tool with which to trade and profit. After making explicit the taxable relevance of bitcoin as exclusively a medium of exchange, the document looks into three other agents in the ecosystem.
Identifying Crypto Roles and Taxable Events
The first section defines the function of mining as the “central activity in the mathematical algorithm-based program of the Bitcoin system [and] the performance of their computer networks is a basic prerequisite for maintaining the system.”
The document continues, in refreshing clarity, by stating that the “remuneration” that miners receive for upholding the network is both “voluntary” and “is not directly related to the services of the miners.”
Legislatively, miners are treated as non-agents as the activities of miners are “non-controllable operations.” Concluding, the bitcoin miners receive for their “work” is exempt from tax as “the mining services are not provided within the framework of a performance exchange relationship.”
In the second portion, the document examines wallet holders, but fails to address contemptuous airdrops and “free money forks.”
The last portion addresses the role that exchanges play and how best these platforms should be paying the state their fair dues. In this case, and the case of crypto wallet taxation, due diligence by the German citizenry is needed. In determining one’s liabilities for the latter, it’s critical that one understand the distinction between an intermediary and “a technical marketplace for the acquisition or trading of bitcoin.”
If it falls under the intermediary mentioned above, then, according to the VAT Directive, it is possible that the exchange is exempt from taxes.From here, we begin tumbling down the rabbit hole of tax law in Europe, which for some may be very common ground. Common ground in the crypto sphere? Germany may have finally merged the unmergeable.