Germany’s Ministry of Finance has decided not to tax people who use Bitcoin to make purchases of goods and services. The Ministry of Finance based their decision on a ruling from the European Union Court of Justice in 2015. Germany’s interpretation of the court’s ruling is likely to set a precedent throughout the entire EU. The finance ministry wrote:
"Virtual currencies become the equivalent to legal means of payment, insofar as these so-called virtual currencies of those involved in the transaction as an alternative contractual and immediate means of payment have been accepted."
Germany’s decision is also a boon to miners, as the Ministry of Finance also determined that block rewards earned through mining should not be taxed. However, ordinary crypto investors who convert their holdings directly to fiat will still be taxed.
Capital gains woes
In the US, the IRS still regards cryptocurrency as property, meaning that every time you pay for something using Bitcoin, the tax authorities treat it as if you sold real property. In other words, when you pay for coffee using crypto, the IRS says you owe capital gains on the $5 worth of digital currency you spent.
Under US law, the buyer of that cup of coffee must compute their cost basis for the cryptocurrency they used in the transaction. Then, the person must use first-in-first-out (FIFO) accounting methods to determine if the “sale” of their crypto is a long-term or short-term gain. Finally, they must declare the transaction on their taxes and pay the appropriate amount.
If you bought Bitcoin at $2,000 per coin and bought your $5 cup of coffee when Bitcoin price was $10,000, your “capital gain” is $4. If you’ve owned that Bitcoin for more than a year, you’ll pay a more favorable tax rate (either 0, 15 or 20 percent) on that $4. If you’ve owned your Bitcoin for less than a year, you’ll pay your nominal tax rate. Thus if you are in the 25 percent tax bracket, you’ll owe the IRS exactly $1 in taxes for that transaction.
Such arcane and complex rules make spending crypto directly, without first converting to fiat, extremely unwieldy and impractical. It’s also a serious impediment to mainstream adoption. Germany’s tax exemption for crypto purchases will go a long way toward making such transactions feasible.
Congressman Jared Polis submitted the “Cryptocurrency Tax Fairness Act” to Congress last fall, attempting to streamline the tax code with respect to digital currencies. His act would have provided a de minimus level of $600, exempting all crypto purchases under that amount from taxation. Congressman Polis tried to get the language added to last year’s major tax reform package, but Congressional leaders demurred.