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Draft on the taxation of cryptocurrency is finalized!

Draft on the taxation of cryptocurrency is finalized!

Much speculation accompanied the run-up to the new cryptocurrency taxation legislation. The draft Eco-Social Tax Reform Act and accompanying changes have now been finalised in detail. 

As suspected, the tax reform will treat cryptocurrencies as securities from 1 March 2022. This means that realised price increases will be subject to a special tax rate of 27.5%. However, the draft does not just lay down clear rules for the taxation of realised price increases, but also contains even more far-reaching regulations. 

Until now (and until 1 March 2022), the tax authorities have ruled that the sale or exchange of crypto-assets had to be classified as a speculative transaction for private investors. This had the advantage that income could be realised tax-free after a holding period of more than a year. Thus, if more than one year had passed between the time of purchase and sale of cryptocurrencies, any positive difference between the purchase and sale value was tax-free. 

If, on the other hand, cryptocurrencies were sold before the end of the first year, income was taxed according to the individual income tax rate and could amount to up to 55% depending on the total income generated. In determining the end of the holding period, it is imperative to note that not just the final exchange of cryptocurrencies back into FIAT currencies (e.g. euros) is tax relevant. Any intermediate exchange of crypto-assets into other crypto-assets (e.g. BTC-ETH) also constitutes a taxable exchange in each case. 

The new regulation ends the advantageous tax exemption of price increases after a holding period of more than one year for all cryptocurrencies acquired after 28 February 2021. Cryptocurrencies acquired before 28 February 2021, on the other hand, are considered “old stock” and continue to enjoy the benefit of the previous regime. The retrospective cutoff date is hotly debated, as investors had always assumed eligibility for the corresponding tax exemption after a one-year holding period in the case of past acquisitions. 

Comparing the current directive with the new cryptocurrency taxation legislation, it is clear that the new regulation is more favourable from a tax perspective for traders who buy and sell crypto positions quickly and therefore under the one-year holding period because their income will then “only” be subject to a 27.5% tax rate instead of their income tax rate (up to 55%). For investors who pursue a “buy and hold” strategy, the abolition of the speculation period has disadvantageous consequences, as their income from cryptocurrencies is then no longer tax-free after more than one year, but subject to a tax rate of 27.5%. 

A new and unexpectedly positive aspect of the regulation is that cryptocurrency-to-cryptocurrency exchange (e.g. BTC-ETH) is no longer a tax-relevant transaction. Until now - provided that the one-year holding period was not exceeded - any positive difference between the original purchase value and the value (in euros) of the exchanged cryptocurrency at the time of exchange was taxable. Under the new regulation, tax is only due when the respective cryptocurrency is exchanged back into a legally recognised means of payment - namely into FIAT currency (e.g. euro, dollar). 

A further positive in terms of legal certainty is that there is now clear regulation for staking, airdrops and bounties. A brief explanation of these terms: Staking involves holding coins in a wallet and “freezing” them for blockchain validation. In return, you receive “staking rewards” - hence more crypto assets transferred to your wallet. “Airdrops” are free cryptocurrencies – usually granted in return for providing marketing services, staking services or making personal data available. “Bounties” are cryptocurrencies transferred for other minor services. 

The legislator now stipulates that cryptocurrencies received in connection with staking, airdrops or bounties will be recognised as having an acquisition value of zero. Tax liability only arises in the event of a later sale. If, for example, you receive staking rewards from MINA with an equivalent value of 100 euros and later sell this MINA for 500 euros, it is not the price increase of 400 euros that is tax-relevant, but the entire increase in assets from staking of 500 euros. The staking gains of 500 euros are thus taxable at 27.5 % upon sale, resulting in 137.5 euros in tax to be paid. 

Even if the retrospective cut-off date is unpalatable to investors, the regulation is “crypto-friendly” overall the main benefit is that trading cryptocurrencies with each other is no longer a taxable exchange transaction and there are now clear regulations on staking, airdrops and bounties.

Due to the complexity of crypto-asset taxation, we always recommend individual legal advice, which we are happy to provide. 


AUTHOR:

Mag. Ronald Frankl, Attorney-at-Law and Managing Partner at LGP

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