BFH on Taxation of Crypto Gains

What the BFH crypto gains judgment decided

In its judgment of 14 February 2023 – IX R 3/22, announced in press release No. 013/23 of 28 February 2023, the Federal Fiscal Court (Bundesfinanzhof, BFH) held that gains from selling or exchanging cryptocurrencies such as Bitcoin, Ether and Monero held as private assets are taxable as private disposal transactions under § 23(1) sentence 1 no. 2 of the Income Tax Act (EStG) if acquisition and disposal occur within one year. The BFH crypto gains ruling classified virtual currencies (currency or payment tokens) as "other assets" (andere Wirtschaftsgüter) and rejected the argument that taxation was unconstitutional because of a structural enforcement deficit.

The decision settled a question that had been disputed in German tax practice for years. Some argued that cryptocurrencies were not "assets" because they are merely entries in a decentralised ledger, or that taxation was unconstitutional because the authorities could not effectively verify transactions on anonymous platforms. The BFH crypto gains judgment rejected both arguments. For private investors and for companies advising them, the practical consequences are clear: short-term gains are taxable at the individual's income tax rate, long-term gains after more than one year are tax-free, and records of acquisition dates and costs are essential.

The facts of the case

The taxpayer had acquired, exchanged and sold various cryptocurrencies, specifically Bitcoin, Ether and Monero, in his private capacity. In the year in dispute, 2017, he made a total gain of EUR 3.4 million. The tax office treated the gains as income from private disposal transactions. The taxpayer's action before the finance court was largely unsuccessful, and he appealed to the BFH, arguing that cryptocurrencies were not assets within the meaning of § 23 EStG and that their taxation violated the constitutional principle of equal enforcement.

Cryptocurrencies as assets under § 23 EStG

The BFH interpreted the term "asset" (Wirtschaftsgut) broadly. It covers not only things and rights but also factual situations, concrete opportunities and advantages for which a taxpayer is prepared to pay and which, according to general commercial understanding, are capable of separate, independent valuation. Virtual currencies meet these requirements: they are acquired for money, traded on platforms and exchanges, have a market price and can be transferred.

The fact that they exist only as data in a blockchain and are not legal tender does not prevent them from being assets.

Under § 23(1) sentence 1 no. 2 EStG, disposals of other assets are private disposal transactions if the period between acquisition and disposal does not exceed one year. An exchange of one cryptocurrency for another counts as a disposal of the first and an acquisition of the second, so each swap can trigger a taxable gain or a loss. The gain is the difference between the disposal proceeds and the acquisition and transaction costs.

No structural enforcement deficit

The taxpayer argued that taxing crypto gains was unconstitutional because the tax authorities could not systematically detect such gains, so honest taxpayers would be disadvantaged. The Federal Constitutional Court has held that a tax may be unconstitutional if its enforcement structurally fails, as it did in a well-known decision concerning speculative gains from securities in the 1990s. The BFH found no such deficit for cryptocurrencies.

There were no legal rules that systematically prevented the authorities from collecting information, and there was no indication that the tax administration could not determine gains and losses from crypto transactions. Isolated cases in which taxpayers escape detection despite investigation efforts do not amount to a structural deficit.

Since the decision, the information available to tax authorities has increased further. The EU directive on administrative cooperation in tax matters has been amended (DAC8) to require crypto-asset service providers to report transactions of their customers to tax authorities, with reporting obligations applying from 2026. This makes non-declaration riskier and strengthens the BFH's assessment.

Holding period, exemption and losses

Gains from cryptocurrencies held for more than one year are not taxable as private disposal transactions, regardless of their amount. The extension of the holding period to ten years for assets used as a source of income, provided in § 23(1) sentence 1 no. 2 sentence 4 EStG, is interpreted by the Federal Ministry of Finance's guidance on crypto assets as not applying to cryptocurrencies used for lending or staking, although the income from those activities is itself taxable.

Since 2024, total gains from private disposal transactions in a calendar year remain tax-free if they are below EUR 1,000; this is an exemption limit (Freigrenze), so once the threshold is reached, the entire gain is taxable.

Losses from private disposal transactions can only be offset against gains from such transactions in the same year, carried back one year or carried forward. They cannot be offset against other income such as salary. Investors should therefore track both gains and losses carefully across all wallets and platforms.

Calculating gains after the BFH crypto gains ruling

The BFH crypto gains judgment confirms the principle of taxation but leaves much of the calculation to general rules and administrative guidance. The gain is the disposal price, or for swaps the market value of the cryptocurrency received, minus acquisition costs and incidental costs such as trading fees.

Values must be converted into euros at the time of each transaction, using a reasonable and consistently applied source of exchange rates. Where an investor holds units of the same cryptocurrency acquired at different times, the units disposed of must be identified to determine whether the one-year period has expired and which acquisition cost applies; the Federal Ministry of Finance's guidance sets out the accepted methods, and investors should apply one method consistently per wallet.

Transfers between an investor's own wallets are not disposals, but they complicate tracking. Airdrops, hard forks, staking rewards and lending income each have their own treatment under the guidance and can create taxable income at receipt as well as acquisition costs for later disposals. Specialised software helps, but its output should be checked for completeness, especially for decentralised finance transactions and for platforms that no longer exist.

Tax audits and investigations of crypto investors

Tax authorities in Germany increasingly target crypto gains. Information comes from collective requests to platforms, from exchange of information with other countries and, from 2026, from DAC8 reporting. Where undeclared gains come to light, the consequences can include back taxes with interest and, if intent is established, criminal tax proceedings. A voluntary disclosure under § 371 of the Fiscal Code can lead to immunity from prosecution, but only if it is complete for all relevant years and made before the offence has been discovered or an audit has been announced. For large amounts of evaded tax, an additional surcharge applies under the Fiscal Code.

In audits, the burden of documenting acquisition costs and dates lies largely with the taxpayer. Where documentation is missing, the authorities may estimate, which often leads to higher tax than the actual figures would have produced. Investors with substantial historical activity should therefore reconstruct their transaction history now, while data from platforms and blockchains is still accessible.

Business assets and corporate holders

The BFH crypto gains ruling concerns cryptocurrencies held as private assets by individuals. Where cryptocurrencies are held as business assets, for example by a trader, a company or a partnership with business income, all gains are taxable regardless of holding period, under the rules for business income, and are subject to trade tax where applicable. Corporations pay corporate income tax and trade tax on gains. Mining and staking can constitute commercial activities depending on their scale and organisation, which affects both income tax and VAT treatment. Companies accepting cryptocurrencies as payment or holding them as treasury assets must also address accounting and valuation questions.

For crypto-asset service providers, the regulatory framework under the EU Markets in Crypto-Assets Regulation (MiCAR) and the anti-money laundering rules interacts with tax reporting duties. Businesses should align their compliance processes so that customer due diligence data can also be used for tax reporting.

Succession, gifts and structuring

Cryptocurrencies are also relevant in estate and gift planning. They form part of a person's estate and are subject to inheritance and gift tax at their market value at the date of death or gift, like other assets. Heirs need access to wallets and private keys, which raises practical questions that a will or a separate instruction should address. Because the one-year holding period continues to run for heirs and donees on the basis of the original acquisition date, gifts and inheritances do not reset it, which can be relevant for planning: under § 23(1) sentence 3 EStG, the acquisition by the legal predecessor is attributed to the person acquiring free of charge, so the predecessor's acquisition date and costs continue to apply.

Investors with substantial holdings sometimes consider holding crypto assets through a company. A corporation pays corporate income tax and trade tax on all gains, regardless of holding period, so a corporate structure is rarely advantageous for long-term holdings that would be tax-free in private hands after one year. For active trading, the comparison is different, and the choice should be made on the basis of a careful calculation that also takes into account the costs of the structure, the taxation of distributions and the treatment of a later exit.

How TRW & Co helps

We advise private investors, family offices and companies on the taxation of crypto assets in Germany, including holding period planning, documentation, voluntary disclosures and disputes with tax authorities and before the finance courts. For businesses, we advise on the tax and regulatory treatment of crypto activities and on reporting obligations. Our work connects with our tax disputes and fintech and crypto practices; see also our notes on the taxation of crypto assets, voluntary disclosure and MiCAR authorisation. Please contact us to discuss your situation. This briefing is general information, not legal or tax advice.