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By Anka Hakert, Esq.
WINHELLER Attorneys at Law & Tax Advisors
Frankfurt, Germany

The last few days and weeks have seen a lot of uncertainty among companies trading in cryptocurrencies. According to a media report, the Bonn tax office had refused to grant VAT exemptions for transactions in Bitcoin as they considered Bitcoin to be no legal tender. This opinion is however contradicted by the Hedqvist Judgment of the European Court of Justice (ECJ). The latter had ruled that VAT exemptions applied to transactions in Bitcoin because Bitcoin had no other purpose for operators than to be a means of payment. As a result of the harmonization of the European VAT system, this ruling also applies in Germany.

VAT Exemption of Transactions in Bitcoin Also Applies in Germany

Although, after the ECJ's judgment, the Federal Ministry of Finance had already come to an understanding on this matter, until recently, it had not stipulated its opinion in a document binding upon the tax authorities. In its latest circular, it has now clearly expressed its legal position. Referring to the ECJ's judgment, the tax offices will – from now on – have to treat transactions in Bitcoin as VAT exempt. Besides Bitcoin, this also applies to any other cryptocurrency which is accepted by the operators as a direct contractual means of payment and which has no purpose other than to be a means of payment.

In addition, the Federal Ministry of Finance has made it clear that in-game currencies (like WoW gold) are not to be considered as means of payment. Therefore, the tax exemption for cryptocurrencies does not apply.

Mining Not Subject to VAT

In addition to the ECJ's judgment, the Federal Ministry of Finance also declared that mining transactions are not subject to VAT. Correctly, the Ministry of Finance argued that the so-called block reward, i.e. the Bitcoins you receive when finding a block, does not flow to the miner as part of an exchange of services.

In addition, the operators' transaction fees are also VAT exempt as voluntary payments not directly related to the miner's service. Apparently, the Federal Ministry of Finance does not make a difference between solo mining and pool mining. However, as regards pool mining, the question arises as to whether the relation between the mining pool operator and the clients contributing processing power is a service exchange relation to be assessed as subject to VAT.

Other services provided in the field of cryptocurrencies will probably have to be addressed on a case-by-case basis. According to the Federal Ministry of Finance's circular, fees for the provision of a wallet, for example, are generally subject to VAT. In addition, the Federal Ministry of Finance considers that the operator of a digital trading platform for cryptocurrencies also provides a service that is basically subject to taxation. A VAT exemption may apply only if the platform operator himself acts as an intermediary, who sells and purchases Bitcoin.

VAT Exemption Should Be Examined in Each Individual Case

The circular issued by the Federal Ministry of Finance is good news for all those concerned with cryptocurrencies. Beyond the mere trading in Bitcoin, the question of VAT exemption will, however, continue to be decided on a case-by-case basis. Especially, the question of whether or not a coin has no purpose other than to be means of payment will require an assessment not only in law but also in fact. We will be happy to check for you whether or not the principles outlined in the Federal Ministry of Finance's circular apply to your activities and whether you will be able to benefit from VAT exemption.