This article is the first part of an analysis on the differences in tax implications of digital assets and cryptocurrencies in the German-speaking countries. The article covers three types of qualified investors with three different products in which these investors invest. The first part dealt with Liechtenstein and Switzerland, while the second part refers to Germany and Austria.
The report will treat three different types of qualified investors in four different countries with three different investment products. The facts and circumstances always stay the same, only the residence changes. First of all, we have Lisa who possesses assets worth CHF 10 million and has declared in writing that she wants to be considered as a qualified investor. These are private assets. Her sister Sara did not make such a declaration but possesses the same amount of money. She is not considered to be a qualified investor. Secondly, there is Paul. Paul possesses assets worth CHF 20 million, but half of them are invested through a legal entity: Paul’s Road to Happiness AG. Lastly, there is CryptInvest AG, a bank which buys crypto on behalf of its clients and is considered a legal person. CryptInvest has assets of CHF 50 million and charges a provision of 1% of the amount invested for each of their clients’ asset investment. In addition, the bank charges 1% of the realized capital gain at the time of the sale.
All of them want to invest 10% of their assets in Bitcoin and expect a 50% rise of the investment. However, they are not sure if they should invest this amount directly, via an AIF, or a certificate. It is assumed that they will sell the Bitcoin investment as soon as it has increased by 50%. An AIF is a collective investment that raises capital from some investors to invest it in accordance with the specific investment strategy and with the aim to generate benefits for the investors. A certificate represents the evidence of ownership of a financial security such as a bond or stock market shares in corporation. It depends on the performance of the underlying asset. Furthermore, they have to take the intended time of holding the asset into account when comparing the investment possibilities.
Lisa and Sara
Lisa and Sara have their residency in Germany. First of all, it can be noted that no wealth tax exists in Germany. Hence, only the income tax has to be examined in order to check if there is a possible tax liability from holding and selling Bitcoin. As explained above, Germany considers Bitcoin to be digital private money. It follows that the sale of Bitcoin is classified as a private speculation. According to Section 23 (1) sentence 1 no. 2 of the German Income Tax Act (Einkommenssteuergesetz — EStG), the sale of Bitcoin is tax exempt if the period between acquisition and sale exceeds one year. However, there is one exception: If ongoing revenue has been earned with this digital currency, the income is subject to tax at the personal tax rate plus an additional solidarity surcharge. Additionally, the speculation period is extended to ten years as the asset served as a source of income. If Lisa or Sara sell Bitcoin within one year after the acquisition, they have to tax the capital gain from the sale with their personal tax rate if the exemption limit of €600 is exceeded. If the gain of €500,000 is their only income, they have to tax it with a tax rate of 45% and subtract €17,078.4, which results in a tax liability of €207,921.6. The amount of €17,078.4 has to be subtracted as the formula to calculate the tax liability — in the case of a taxable income above €270,501 − is: 0.45 × X − 17,078.4 (as 2020). Furthermore, a solidarity surcharge of 5.5%, here €11,435.69, has to be paid.
If they, in contrast, invest in a certificate, they would pay a withholding tax of 25% plus a solidarity surcharge of 5.5% on the withholding tax for both — the capital gains from the sale of the certificate and the current earnings. The duration of the holding of the certificate does not affect the tax liability. The same is true if they invested in an AIF. This would result in a tax liability of €131,875. Therefore, investing via a certificate or AIF is more advantageous in case of a high income from capital gains.
Paul’s Road to Happiness AG
Paul’s investment is considered to be in the business assets of his business. Therefore, there is no income from private sales, but from commercial business. The capital gains have to be taxed as income of Paul’s Road to Happiness AG and with a corporate tax rate of 15% plus solidarity surcharge of 5.5% of the corporate tax. This leads to a tax liability of €158,250. Nothing changes when Paul invests the money via a certificate or an AIF as the income is still considered to be income of the AG from commercial business activity.
Additionally, business tax has to be applied on the taxable income. The tax rate is a federal rate and amounts to 3.5%. The municipal assessment rate comes on top and ranges from 200% to 490% of the 3.5%, with an average rate of 380%. This leads to a tax rate of at least 7%. Hence, there are taxes from business tax worth €70,000 as a minimum. If the assessment rate of the municipality is higher, the tax liability increases as well. With regard to VAT, Germany also states that the exchange from conventional currencies to Bitcoin and vice versa is to be classified as a taxable other service, but tax exempt if used as a means of payment.
CryptInvest AG’s income is also subject to corporate tax. Therefore, the income from the initial investment activity and the income from the participation on the gains are subject to the corporate tax of 15% plus solidarity surcharge of 5.5%. This leads to a tax liability of €11,868.75. Same as in the case of Paul’s Road to Happiness AG,investing the money via a certificate or an AIF does not result in a different tax liability as the generated income is considered to be income related to business activity of CryptInvest AG.
CryptInvest AG is also subject to business tax. As it has a taxable income of €75,000, the business tax liability amounts to at least €5,250.
With regard to VAT, there is no tax liability for the initial investment of the clients’ money and for the capital gains as brokerage of financial assets and income that is based on that activity are tax exempt.
Lisa and Sara
Lisa and Sara have their residency in Austria. Similar to Germany, the investment in Bitcoin is considered to be an exchange of assets. As long as there is no interest income coming from the crypto asset, as it is the case here, the sale of the asset has to be taxed using the personal tax rate as long as the time period between the acquisition and the sale is less than a year. In this case, it is considered to be a speculative trade. Furthermore, the capital gain has to be more than €440. If it is below this threshold, there is no tax liability. The personal tax rate can amount up to 55%. If Lisa and Sara hold the Bitcoins for more than a year and sell them afterwards, they do not have to pay taxes on the capital gain.
In contrast, if they invest via a certificate or a fund, they have to pay capital gains tax. The tax rate is 27.5%. As they would have capital gains of €500,000, they would have a tax liability of €137,500 when investing via a certificate or a fund. The duration of holding the certificate or fund has no impact on the tax liability.
Paul’s Road to Happiness AG
Bitcoins are assets of the business and are, therefore, considered to be business assets. The income from the sale of such assets is income from business activity and has to be taxed with a tax rate of 25% leading to a tax liability of €25,000. If the investment was made via an AIF or a certificate, the capital gains tax rate of 27.5% has to be applied. This would result in a tax liability of €275,000.
Similar to Germany, there is no VAT as the exchange of legal tenders to Bitcoin is a non-taxable activity according to the European Court of Justice.
As a corporation, CryptInvest AG’s income is subject to a corporate tax rate of 25%. Therefore, the income from the investment activity has to be taxed with 25% resulting in a tax liability of €12,500. The income from the provisions in contrast has to be taxed with 27.5%, which would lead to a tax liability of €6,875. All together the corporation has a tax liability of €19,375. It would make no difference if the investment were to be made via an AIF or a certificate as the income from this investment is still considered to be income from the normal business activity of the corporation and has to be taxed with 25% and 27.5%.
Similar to Germany, brokerage of financial assets is exempt from VAT. Hence, there is no VAT liability for CryptInvest AG.
To summarize, Liechtenstein shows the lowest taxes on Bitcoin for natural and legal persons followed by Switzerland, which depends on the specific canton of residence. Germany and Austria have the highest taxes. However, it should be noted that in Liechtenstein and Switzerland, there is a wealth tax that can lead to high taxes if high amounts of cryptocurrencies are held. In most cases, there are no advantages of holding a certificate or AIF. However, if the investor has its residence in Germany or Austria and holds a digital asset for less than a year, it is advantageous if they invested in an AIF or certificate as long as his personal tax rate is above 27.5% in Austria and 26.375% in Germany. If they hold the digital asset for more than a year, it is better to invest directly. It all depends on the investing horizon and the tax rate, which again depends on the personal income overall.
This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.