Exit Tax and Cryptocurrencies: Tax problems when emigrating with Bitcoin & Co.

  • Post author:
  • Post category:Steuerrecht

Many investors who hold cryptocurrencies in their private assets may be toying with the idea of leaving Germany and moving abroad.

Domicile and habitual residence

In principle, you are liable for tax on your worldwide income in Germany if you have either your domicile (Section 8 of the German Fiscal Code) or your habitual residence (Section 9 of the German Fiscal Code) in Germany.

A person shall be deemed to have his or her habitual residence where he or she is staying under circumstances which indicate that he or she is staying at that place or in that area on more than a temporary basis. Habitual residence within the scope of this Act shall always and from the beginning be deemed to be a continuous stay of more than six months; short-term interruptions shall not be taken into account.

If the domicile or habitual residence is abandoned, the unlimited tax liability in Germany is terminated. This raises the question of whether this can lead to a disposal of the cryptocurrencies held.

Basic Features § 23 EStG

As is generally known, a private sale transaction with cryptocurrencies according to Section 23 of the German Income Tax Act (EStG) exists if there is less than one year between the acquisition and sale of the cryptocurrencies.

Furthermore, the exemption limit (no tax-free amount) of 600 euros must be exceeded. If there is more than one year between the acquisition and the disposal, the capital gain remains fully tax-free. Finally, in the view of the tax authorities, each disposal transaction of a cryptocurrency must be considered individually in the context of the assessment under Section 23 EStG according to the so-called first-in-first-out (FiFo) method.

A disposal within the meaning of Section 23 EStG requires a transfer of the acquired cryptocurrencies to a third party against payment. Therefore, a sale of the cryptocurrencies held as private assets cannot be assumed due to the departure from Germany. There is also no transaction similar to a sale.

Foreign Tax Act (AStG)

Those willing to emigrate may have heard of the Foreign Tax Act (AStG). The Foreign Tax Act was introduced in 1973 and is intended to ensure German taxation rights in the event of an emigration abroad or a transfer of income or assets to a foreign country.

First of all, exit taxation may arise under Sec. 6 AStG in conjunction with Sec. 17 EStG if the emigrant holds an interest of at least 1% in a corporation. According to Sec. 6 (1) Sentence AStG, the prerequisite is specifically that the natural person was subject to unlimited tax liability for a total of at least ten years and that his unlimited tax liability ends as a result of giving up his domicile or habitual residence. If the shareholding in a corporation is less than 1%, exit taxation is not an option. It is to be assumed that cryptocurrencies are obviously not to be regarded as shares in a corporation within the meaning of Section 17 EStG.

AStG und Aragon (ANT)

The assessment might be different for Decentralized Autonomous Organizations (DAO), e.g. the Aragon organization. With the help of the Aragon "governance Lego blocks" DAOs can be created. However, the tax classification is completely unclear, since the legal classification of a DAO under company law is already unclear.

Extended unlimited tax liability according to § 2 AStG

The extended unlimited tax liability is regulated in § 2 AStG. A distinction must be made between the personal and factual requirements. The personal requirements for extended limited tax liability pursuant to Sec. 2 (1) AStG include:

  • the taxpayer was in the last ten years before the end of his unlimited tax liability 
  • as a German citizen 
  • was subject to unlimited income tax liability for a total of at least five years. 

The extended limited tax liability requires, among other things, that the taxpayer moves to a low-taxed foreign territory. The legislator presumes such a territory if the foreign territory levies an income tax on an unmarried person with an income of 77,000 euros that is more than one third lower than the German income tax.

Finally, the person must have substantial interests within the scope of this law. Material interests means that the domestic income, i.e. income that is not foreign income within the meaning of Section 34d EStG in the case of unlimited income tax liability,

  • amount to more than 30 percent of their total income in the assessment period or exceed 62,000 euros (No. 2) or 
  • at the beginning of the assessment period, the assets of the person whose income would not be foreign income within the meaning of Section 34d EStG if he or she were subject to unlimited income tax liability exceed 30 percent of his or her total assets, or 
  • 154 000 Euro not exceeding.

The concept of income also includes other income within the meaning of Section 22 EStG if, in the case of private sales transactions within the meaning of Section 23 EStG, the assets sold (i.e. cryptocurrencies) are not located abroad.  In any case, if the cryptocurrencies are stored on a cold wallet and the investor then moves away from Germany, the sale of the cryptocurrency within the speculation period of § 23 para 1 sentence 1 No. 2 EStG or under the conditions of § 23 para 1 sentence 1 No. 2 sentence 4 EStG within 10 years should trigger the extended limited tax liability under § 2 AStG.  

Therefore, a lawyer specializing in cryptocurrencies should always be consulted in removal cases involving cryptocurrencies.

by Martin Figatowski, Attorney at Law, LL.M. (Tax)