What’s up guys? It’s Blu here and I’d like to welcome you
in the new episode of Blockchain Central. In today’s episode we’ll discuss all matters
concerning taxes of virtual goods. While we’ll do our best to be as accurate
as helpful as possible, please note that the content of this episode does neither represent
financial, legal, or tax advice, nor is it supposed to be understood or interpreted as
solicitation to buy or sell any securities, coins or tokens. Since most of you guys are busy trading your
Bitcoins, Ethers and Altcoins, I’m guessing you’ve had a brilliant 2017 in terms of
performance. Most digital assets have achieved pretty nice
gains while chasing from one all-time high to the next. In fact, even institutional investors are
now looking at ways to invest in cryptocurrencies and ICOs as brand-new asset class. But with all those speculations running around,
we need to pause for a second to remember one of our most important and probably also
most dreaded duties: the income tax declaration. Before you shrug this thought off, let me
be clear on the first huge misconception about the tax treatment of digital assets you may
have: they are by no means tax free! Let’s try to clear things up. Based on the ruling by the European Supreme
Court transactions in Bitcoins are not subject to VAT. So, in this respect, there is an EU-wide consensus
on the tax treatment of cryptocurrencies. However! Please bear in mind that this regulation is
not based on a legal classification of digital assets, but results from the interpretation
of the EU’s VAT directive. Therefore, you need to be aware that until
today, there is no definite legal certainty on the income tax treatment of blockchain-based
assets. How does it work in practice? Let’s look at some of the most prominent
financial markets in Europe. For example, according to the statements made
by the German Ministry of Finance, Bitcoins are to be classified as “private money”
and “legal tender”. So, the general opinion among experts is that,
by extension, all cryptocurrencies and tokens should be treated the same. What this would also mean is that (from a
tax perspective) all digital assets should be considered equal to precious metals, art,
or real estate. So, what this basically implies is that at
least for the German market, unlike financial instruments, digital assets would not fall
under a flat rate withholding tax. Therefore, any capital gains you have made
are taxed at your individual progressive rate. Unfortunately, the things turn out to be way
more subtle than the Germans would prefer it. Looking again at the example of Germany, the
income tax act defines a so-called speculation period of 1 year in section 23. It implies that if you buy or hold your coins
for at least that amount of time, the entire capital gain you realize on these coins becomes
tax free. Before you pop the champagne though, a word
of caution. In order for that to happen, you have to be
able to determine the amount of gain, prove the length of the holding period and proactively
report the income in your tax declaration. The point, however, is that all your gains
you have made from trading cryptos and tokens need to be well documented. Otherwise you may really run the risk of getting
in trouble with the tax authorities. For that reason you should have a good overview
of your trading activities and, if necessary, talk to your tax consultant. Let me also remind you that a legal framework
on the tax treatment of digital assets still has to be put in place. As you are probably well aware, the different
types of blockchain-based tokens are all structured in a different way, specially since the business
models behind the companies that issue these tokens can differ drastically. What’s more, they essentially only use the
blockchain as a tool for handling transactions. As a result, it can be argued that existing
tax rules for these business models should also be applied to the tokens, based on the
respective use cases and classifications. As you can clearly see, a framework for categorizing
digital assets is urgently needed to shed some light on the issue of tax treatment. Now, to highlight the fact that this is a
hot topic for discussion, the Frankfurt School of Economics in cooperation with the firm
CryptoTax, published an estimation of the additional amount of taxes collectible in
Germany for 2017. They assume that the market cap has increased
by 460 billion Euro in 2017, a share of 3.5% of users is German and that only 15% of the
capital gains is taxable. Based on this, they arrive at an estimated
tax basis of 2.42 billion Euro. So if we say the individual tax rate averages
30% in Germany, the additional income tax collected in 2017 from investments in digital
assets amounts to roughly 726 million Euro! As you can see, that is a lot of money and
understandably the authorities have every reason to quickly pass tax legislation in
order to get their hands on it. So, what you can take away from this video
is that no proper legal framework for the tax treatment of your tokens and cryptos is
currently in place. The regulation can vary a lot from country
to country. Nevertheless, you must always be able to provide
a nice and clean overview of your trading activities and holdings. As a general rule, you should always stay
informed, and in case of any doubt check back with your tax consultant. So thanks for watching, I hope you found this
overview useful. Please be sure to check out our other videos
and, if you liked this video, make sure to hit that like button, share it with others
and don’t forget to subscribe to Blockchain Central to never miss a beat! Happy investing!