Germany: A Surprising Bitcoin Tax Haven
For many investors, 2017 marked the first year they seriously got into Bitcoin. What had been a novelty that was only understood and traded by geeks, barged into the mainstream consciousness with a 1,308% rise in value.
And where the money flows, the legislators go. They may be a little slow to catch up, but that doesn’t mean you can keep your cryptocurrency gains hidden from the IRS or its foreign equivalent.
In this blog post, we’ll be looking specifically at the German situation. As you will learn below, Germany is a special case when it comes to Bitcoin and altcoin profits – in a good way. This is thanks to the way the German authorities see cryptocurrencies. But first, let’s zoom out to crypto regulations around the world.
Why cryptocurrencies give regimes a headache?
Whether it’s the legislators’ age or simply the rate in which the crypto space develops, law-makers are having a hard time understanding, let alone keeping up with, digital currencies. Added to the “culture shock” is the fact that it’s hard to trace money once it’s converted to Bitcoin, exchanged for altcoins, and used to buy more Bitcoin with, for example.
And when money is hard to trace, it can easily be used for illegal activities such as the arms and drugs trade and money-laundering. That’s why most jurisdictions have put Know Your Customer (KYC) regulations in place, which require cryptocurrency exchanges to verify their users’ identities.
Some exchanges are doing a stellar job in encouraging users to verify themselves. They will let you deposit when you’re unverified, but won’t let you withdraw until you’re verified. But let’s not get distracted; that is a whole different story.
If you are trading Bitcoin and other cryptocurrencies yourself, you will likely have gone through a verification process, in which you had to upload a scan of your passport or driver’s license, and a utility bill or a bank statement to prove your address with.
While these can be faked to change someone’s tax residency, the fact is that most users will comply, thereby giving governments some grip on this exploding industry. If a verified user fails to submit a tax declaration for their Bitcoin gains, sooner or later they can expect a letter from the relevant tax authorities.
For someone who is serious about crypto trading, it can pay off to be a resident in the right country. Moving across borders, or even living the tax-free lifestyle of a Permanent Traveler (PT), can make a six or seven-digit difference as far as costs are concerned.
Germany: no tax if you hold Bitcoin for one year
As opposed to most developed countries, Germany doesn’t see cryptos as currencies, commodities, or stocks. Instead, Bitcoin and altcoins are considered private money. This distinction is important since private sales bring tax benefits in Germany.
According to rule 23 EStG, private sales that do not exceed 600 euros are tax exempted. But perhaps even more interesting is the fact that you pay no tax if you hold your Bitcoin, Litecoin, Ethereum, Ripple, or other altcoins, for a period of over one year. No matter how much you make selling your cryptocurrencies, you don’t pay tax on the capital gains if you’ve held them for over one year.
Example of the German ‘Bitcoin tax’
For the sake of this example, let’s suppose you have been resident in Germany for the past few years. On 1 January 2017, you bought 1 BTC for $1,000. If you sold it on December 15th to enjoy a little Christmas bonus worth $17,000, you would have to pay your capital gains tax over the $16,000 profit. If, however, you had held your Bitcoin past 1 January 2018, all capital gains tax would be waived.
If you are currently in Germany and you are holding a (fraction of) Bitcoin you bought back in 2017, it may be worth sitting out that year. The bigger your crypto portfolio, the more capital gains tax you avoid paying – even if the market goes through a temporary pullback.
Should you move to Germany?
The way Germany treats cryptocurrencies is a step in the right direction for crypto fans. But whether it will create an influx of Bitcoin traders to the country, remains to be seen. After all, the logical way to becoming a tax resident in Germany is by having your place of residence there.
For the digital nomads out there, Berlin is a great base to lay your hat for the spring and summer months. It has a very active scene of online workers, with lots of workshops, hackathons, conferences, and crypto meetups. Add to that a bustling nightlife and this might just be the perfect place to live that ‘Bitcoin lifestyle’.
Traditional work-from-home day traders will be less inclined to move to Germany. Used to short-term holding, they will find it irresistible to sell their positions once their profits hit the double digits. There is always another coin that has the potential to ‘moon’, and one year is a very, very long time in the business of currency trading.
But if you are lucky enough to be living in Germany already, you might consider ‘holding’ your digital assets for the mid to long term. And since Bitcoin isn’t predicted to hit $1 million dollars before 2020 anyway, this might very well be the best strategy.
Bitcoin is here to stay, and sooner or later all governments will catch up with it. Whether they jump on the bandwagon with their own cryptocurrencies or not, you will be required to report yours – and pay your taxes. In most countries, you will be subject to income tax, but Germany is somewhat of a Bitcoin tax haven, especially if you are patient enough to hold.
So should you pack your suitcase and fly to Berlin? If you’re confident enough that you can offset your tax burden by trading hard, there is no need to. But if you’re one who likes to dollar (or euro, or yen) cost average their way into a sizeable Bitcoin holding, Germany is more than deserving of your consideration. And we’ll be happy to get you German residency and assist you with international tax advice.