I work as the Business Operations Manager at Neufund, a blockchain-based startup building a community-owned investment ecosystem on the Ethereum Blockchain.

I take care of various things, one of which is the company’s budget. When we started in September 2016 this was easy. Classical budget for a “classical” startup: Managing monthly expenses being the main task. Sometimes (hopefully) some investment activities must be tracked. Revenue? No.

At that time, this felt like an easy job to do, especially for someone who likes spreadsheets and money. At the time I had no f*cking clue…

Very shortly after, I somehow found myself in the position where I was supposed to manage normal money (fiat currencies) on a bank account at a well-known Berlin-based bank and “alien” money (cryptocurrencies) on a corporate account at Kraken, one of the biggest crypto-exchanges.

There is no budget template for that. I can assure you. I was already talking about the challenges of managing a blockchain-startup in my previous post the food chain of Blockchain. So I won’t start again on how hard my life is;) This is the follow-up on the part where I talk about bookkeeping challenges.

After the bookkeeper somehow understood the vague concept of cryptocurrencies, he asked me at that time not that of an obvious question: Can you please send me the account statement from Kraken? So I can follow the transactions and calculate taxes?

This was a turning point. I started researching, talking to experts and applying my findings to Neufund’s operations. Now I want to share with you. Hopefully it will shed some light on the darkness of cryptotaxes.

But before I begin: This is just a general guide and not a legal or tax advice! See also more information at the bottom.

VAT regulations

“Mining and trading of both Cryptocurrencies and cryptotokens poses numerous issues regarding tax law.” Blockchain Policy Initiative Report

This is how the Blockchain Policy Initiative Report’s chapter on cryptotaxes starts. Not so inviting for people like me. It means trouble. Since the report focuses on VAT regulation regarding cryptocurrencies and cryptotokens, I will discuss the results of its analysis. Later I will also on focusing on operational implications of trading cryptocurrencies and -tokens.

Based on the ruling of the European Court of Justice (ECJ) in 2015 trading Bitcoin is exempted from VAT. Hence the Blockchain Policy Initiative Report argues that this should be applicable for all cryptocurrencies and -tokens as long as they serve as means of payment. Which would be good news since paying VAT every time you buy or sell a cryptotoken would kill the market…and bookkeepers. However later on in the report the distinction between cryptocurrencies and cryptotokens is made more clear and so are the interpretations of the ruling in various jurisdictions:

With regards to taxation, it became clear, following the 2015 ruling of the Court of Justice, that the exchange of traditional currency for Cryptocurrency is exempt from VAT. Although the policy before the judgment varied in at least one jurisdiction (Poland), it seems that the ruling has unified the approach across the EU’s Member States. The situation is much less clear with regard to the application of VAT to Tokens. At least in two jurisdictions (Poland, the UK) there some doubts as to whether the VAT exemption should apply. Other jurisdictions have no guidance available from the authorities on that issue (Malta). Whereas in Switzerland, VAT may apply. The reason is the various characteristics of a given Token, which might trigger different tax treatments. On the other hand, similar treatment is expected in certain jurisdictions (Germany, Estonia).

This analysis was based on a legal questionnaire directed to law firms from all over the world that was sent out to collect information on legal frameworks regarding Blockchain. One of the questions there was about the VAT Directive and the distinction in treatment between cryptocurrencies and cryptotokens. Poland, Germany, Estonia, UK, Malta, China, France and Switzerland answered. I compiled a summary for you:

Contact me at aga@neufund.org if you want to contribute to that list.

Cryptoaccounting cryptotaxes in the not-so-crypto-world

Now that I have introduced you to the easy part, being VAT regulations, I want to discuss a few cases where the income tax place the key role. This is the most confusing part of cryptotaxes…

First Case: Exchanging fiat currencies for cryptocurrencies

Let’s say you as a private person OR you as a company have 10000 EUR and exchange it for ETH. Basic case.

According to the research, in most jurisdictions you are obliged to report any gains or losses on the exchanged money. But let me focus on the fun part — gains (showing you examples on losses could be to depressing ;P) and only German regulations. So if your 10000 EUR worth of ETH at the point of exchange is now worth 30000 EUR and you plan to sell it for EUR again, you have to report 20000EUR of gains and this will be taxed.

Case 1

At this point there is one distinction, at least according to German law: If you are a private entity and you kept your ETH un-exchanged for more than one year, you do not have to pay income taxes on the gains. This is tremendous news for private crypto-speculators and -traders. If your “token is capable of being an ongoing source of income” (SMP — Tax treatment of crypto tokens in Germany, page 1), you have to wait ten years in order it be tax-free. Minor set-back.

However, if you dispose of your cryptocurrencies before the given period by selling it for EUR or buying e.g. coffee or a flight ticket with it, the full gains are taxable. The exchange for other economic asset is key here. But no worries, apparently if your gains are up to 600 EUR per year you do not have to report your gains at all. You can still buy your coffee with ETH and you won’t be handcuffed for it at the end of the year. Just don’t drink too much coffee ;)

In the case of a legal entity these rules sadly do not apply. A company needs to report the gains and pay taxes on it. Every. Single. Time.

Second Case: Exchanging fiat currencies for cryptocurrencies and then trading cryptocurrencies for other cryptocurrencies

Let’s say you have exchanged 10000 EUR for ETH and then used your ETH to buy altcoins. Another basic case.

Again you are obliged to report gains and losses. But it this case twice. First of all you need to report the gains or losses on ETH (your 10000EUR worth of ETH became worth 15000EUR during the week until you decided trading) and then you are also bound to report the gains or losses on the altcoin-trade (your 15000EUR worth of ETH became 25000EUR worth of an altcoin).

Case 2

The distinction in German law stays the same: Private entities do not have to pay taxes on the gains if they hold their cryptocurrencies (starting from the first conversion of fiat currency into cryptocurrency) for more than a year. Legal entities are obliged to pay taxes on proceeds the moment it is cashed out to fiat currencies again or exchanged for other economic assets.

In both cases there is one rule to be followed:

THE RULE OF REFERENCE PRICE

Bookkeeping can get very complicated already at this point. I will talk more about it later on. But to make your life and the lives of tax authorities easier and the bookkeeping cleaner: YOU SHOULD ALWAYS REFER TO THE SAME EXCHANGE WHEN IT COMES TO THE PRICE/EXCHANGE RATE OF THE COIN. This simply means that during the whole year, if you do transactions similar to Case 1 and Case 2, you should always calculate with the price from the same source. If you bought your first ETH e.g. on Kraken and then traded it on Bittrex, to calculate all your losses and gains on ETH you should use the corresponding price of it in EURs on Kraken. This is very important to remember when you prepare your accounting statements.

Third Case: You want to pay your employees in cryptocurrencies

This proves to be a whole different story. In this case the company first needs to obtain cryptocurrencies (here: ETH). Then transfer it to the employee. Then the employee can exchange it into fiat currencies (or not).

For the company there are two reference prices: If Ether bought specifically for the salary payment has a higher valuation, you of course need to report the gains. Then the employer pays income taxes (in EUR) on the EUR worth of the ETH transferred to the employee at the time of the transfer. The employee again, as a private entity in Germany, won’t have to pay taxes on gains if he/she holds it for longer than one year.

This is of course the case when the employer transfers a netto amount to the employee. If it is a freelance agreement and the freelancer receives a brutto amount, he or she is obliged to pay his/her income taxes on it in EUR anyways. The reference price of ETH is from the day of the transfer. Not confusing at all ;)

Bookkeeping: How do I archive all those transactions?

For all those of you who somehow take care of finances and accounting at your companies it is nothing new when I say that every month the company is obliged to submit monthly bank account statements, credit card statements and e.g. Paypal account statements along with all receipts and invoices to the accountant. Well… you need to do the same with all crypto currency transactions. For that the crypto-world, and by that I mean the exchanges, are not prepared yet.

What I propose to do is:

Download CSV files with all transactions from Kraken, Bittrex, Poloniex or where ever you have your crypto-corporate accounts (yes, you need a corporate account as a company). Create your own spreadsheet where you follow your every move and transaction with action, date, exchange rate, purpose and amount. Try to align all transactions from the CSV to the spreadsheet (this should be your proof of the transactions).

Btw if you know about existence of any helpful tool created exactly for these purposes - LET ME KNOW. Once discovered, it will go big!

Mining — a whole different cryptotax-world

As you can see I haven’t lost a single word on taxing mined cryptocurrencies and cryptotokens. This has one reason — neither Neufund nor me privately are mining, so we are in no position to talk about it. Nevertheless, as follow-up to this post and Blockchain Policy Initiative Report I am planning to start writing a Global Cryptotax Report. I am in the process of talking to various tax firms all over the world right now. If you are interested in joining or know an expert in this field feel free to contact me at aga@neufund.org.

Conclusion

As you can see it is a mess. But on the bright side, as we like to say at Neufund: Unknown unknowns became known unknowns. This is the first step towards defining the ecostystem of cryptotaxes. It is rather difficult to apply existing (read: old and conservative) regulations on such an innovative concept as cryptocurrencies and especially -tokens. In my opinion, once cryptotokens are defined as a new asset class, new tax regulations will follow. It all depends on how fast regulators can adapt and learn. Understanding the underlying concept is crucial for unifying the legal perspective on cryptoassets. For now, lets work with what we have;) Have fun!