German court denies crypto owner’s attempt to claim $3.6 million as ‘data set’

A plaintiff in Germany who attempted to argue that $3.6 million in crypto gains were not taxable income but instead constituted a “data set” lost the case in front of Germany’s largest financial court on Feb. 28.

In a significant ruling on the tax registration of virtual currencies, the Federal Fiscal Court (BFH) in Germany has determined that capital gains from cryptocurrency transactions are subject to taxation.

As per the rules for income from private sale transactions, crypto investors are obligated to declare these gains on their income tax returns.

On Feb. 28, the BFH declared that cryptocurrencies are considered economic goods subject to an income tax liability for private sales transactions if bought and sold within a year.

However, if investors hold onto the currencies for longer than a year, any profits earned will be tax-free, which is not the case with shares, per German law.

The investor did not consider the “data set” to be a taxable asset

According to the German newspaper Frankfurter Allgemeine Zeitung, there was a disagreement with the tax office regarding whether a particular profit earned from cryptocurrency transactions was subject to income tax.

The plaintiff contended that crypto gains are records and, therefore, cannot be classified as a “commercial asset” liable to income tax.

The plaintiff also argued that the lack of effective enforcement makes taxation unfeasible, as only honest taxpayers report their crypto investments, resulting in an unconstitutional “dumb tax.”

However, the Cologne Finance Court dismissed the lawsuit in 2021, and similar lawsuits challenging cryptocurrency taxation were also unsuccessful before the finance courts of Baden-Württemberg and Berlin-Brandenburg.

The Nuremberg Finance Court had expressed doubts about whether speculative transactions involving virtual currencies were subject to income tax, but these decisions bear no weight on the decision by the federal BFH decision that came down this week.

German court rules that because crypto has market value, taxation of it is possible

The ruling means that virtual currencies, such as Bitcoin and Ethereum, are considered means of payment traded on platforms and exchanges, possessing market value and usable for payment transactions between parties involved.

This is the economic perspective on these currencies, supported by the BFH, in alignment with the Federal Government’s legal opinion presented in May 2022 via a guide on the income tax treatment of bitcoins and other crypto assets.

The BFH also addressed the plaintiff’s argument that only honest individuals pay taxes on crypto profits, stating there is no structural deficit in enforcement. The absence of collection rules and evidence that tax authorities cannot record profits and losses from crypto transactions indicates otherwise.

The BFH considered cases where investigative measures, such as requests for collective information, were unsuccessful as individual cases not warranting a structural deficit in enforcement.

It is uncertain how much tax revenue the Treasury receives from crypto transactions, as income on which income tax is payable is not typically attributed to specific assets, like specific capital gains.