Cryptocurrencies such as Bitcoin, which are also referred to as crypto assets or virtual currencies, continue to enjoy growing popularity. For non-profit corporations, the question arises more and more frequently as to how donations in digital currency are to be classified for tax purposes and which options or obligations to act result from this.
Cryptocurrencies can be described as digital, decentralized payment systems that can be used to carry out transactions that are not under the control of authorities or banks. All digital currencies have the so-called “blockchain principle” in common. When a transaction is carried out using the corresponding cryptocurrency, an encrypted record is created that is added to the existing chain of records from previous transactions. All transfers ever executed are thus transparently visible and accessible, albeit encrypted.
Digital currencies are stored in a so-called “wallet” such as Metamask or Coinbase (see the Metamask vs Coinbase wallet comparison here), which allows their owners to send or receive units of the corresponding cryptocurrency. This can be available either as hardware (comparable to a USB stick) or as a drive on the computer and is a basic prerequisite for dealing with cryptocurrencies.
Accounting and tax recognition
According to the general opinion, crypto assets are marketable and can be evaluated independently and thus classified as assets subject to accounting within the meaning of the German Commercial Code (HGB). If cryptocurrencies are donated, this corresponds to a donation in kind, which means that donation recipients and donors have to ask themselves the question of the evaluation of the donation amount. For this, especially in dealing with cryptocurrencies, it is crucial whether information on the origin of donations is available.
If crypto assets are taken from the business assets and donated, the withdrawal value is to be recognized by the recipient of the donation as a partial value in accordance with § 6 para. 1 no. 4 sentence 1 EStG (plus VAT). Alternatively, in the case of a donation from the business assets, the recognition in the amount of the book value is also possible (so-called book value privilege). The evaluation of the amount of the grant is always the responsibility of the donor when it is withdrawn from the business assets.
The situation is different if the donated assets come from the donor’s private assets. Here it is necessary to differentiate how long the donor has held the digital currency, which is often difficult to understand with cryptocurrencies for technical reasons. If there is less than a year between purchase and donation, there is a taxable sale. In this case, the original own acquisition or production costs are to be recognized. If the holding period is more than one year, the so-called common value according to the Valuation Act, and thus the amount that would be achieved at the time of the donation in the event of a sale is decisive.
This makes it clear that recipients of crypto assets are always required to obtain detailed inquiries from the donor. This also applies against the background of liability of the recipient for a grossly negligent issuance of a donation confirmation according to § 10b Abs. 4 EStG. In view of these liability risks, the publication of the address code of the organization’s own wallet, for example on the website of the potential recipient of the donation, must be viewed critically.
Due to the anonymity of transactions guaranteed by blockchain technology, the necessary information mentioned is only available in encrypted form. As a result, the described tax and liability requirements are not met. This applies in particular with regard to the origin of the donation and the holding period on the part of the donor. Furthermore, in the case of anonymous donations, the issuance of a donation receipt is excluded, which also prevents the possibility of tax deductibility on the part of the donor. A practice-oriented solution can be a basic reference (e.g. on the website) to the acceptance of cryptocurrencies as a donation with a prior indication of all necessary information.
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Taxation of the recipient of donations
In principle, crypto currencies are not legal tender. Accordingly, the sale or exchange into euros would not originally be exempt from VAT under § 4 No. 8b UStG. However, the European Court of Justice ruled that Bitcoins and other virtual currencies can be equated with legal currencies in the event of an exchange. A VAT exemption according to § 4 No. 8b UStG is the result.
Income tax analysis
Furthermore, the question arises as to whether a sale of crypto assets, for example for the purpose of exchange in euros, entails income tax consequences for non-profit corporations. Tax-free are donations from private assets that have been demonstrably held by the donor for more than one year. To a certain extent, the tax exemption is attributed to the recipient corporation. For all other donations, a distinction must be made as to whether the sale is to be attributed to the sphere of tax-privileged asset management or to that of economic business operations in accordance with § 14 AO.
This is stated in the letter from the Federal Ministry of Finance dated 16 June 2021, which is still only available in a draft version. Accordingly, with reference to a judgment of the Federal Finance Court (BFH, the judgment of 20 December 2000 – X R 1/97), the criteria for commercial securities and foreign exchange trading can be used. In the opinion of the Federal Fiscal Court, mere buying and selling – even to a repeated extent – does not constitute an offense for exceeding the limits of asset management. Rather, commerciality only exists in the case of an “exploitation of substantial assets by reallocation” in contrast to a mere “fruit drawing from substance values to be preserved”. The decisive factor is whether the taxpayer acts, for example, as a trader, which, in addition to the scope of the business and the maintenance of an office, can be supported by professional knowledge that makes it possible to exploit exchange rate differences “typical of banking”. According to the Federal Fiscal Court, the overall picture of the criteria is decisive.
Regardless of the criteria established by the BMF, there are some arguments in favor of holding crypto assets for more than a year after acquisition. Corresponding applicability of the holding period of one year relevant to private sales transactions does not appear to be remote. Thus, according to weighty legal opinion, the tax exemption of private real estate transactions is also transferable to the delimitation of asset management and economic business operations in non-profit law. On the other hand, non-profit corporations must take into account that only economically sensible investments with a limited default risk may be maintained. Since the performance of cryptocurrencies in the past has sometimes been subject to extreme fluctuations, it should therefore be weighed up in individual cases whether digital currencies are more likely to be held or sold.
Non-profit associations, foundations, and gGmbHs can be quite open to donations in the form of cryptocurrencies. However, caution should be exercised when calling for anonymous donations by publishing the address data of the digital wallet and the associated acceptance of anonymous donations. Before acceptance, information about the origin of the donation and the donor should be obtained. There are good arguments in favor of assigning the sale of donations received to the tax-privileged sphere of asset management. Nevertheless, the possibility remains here that the tax authorities assume a commercial activity in the event of a more extensive sale. If larger donations of cryptocurrencies are made, it is therefore recommended to make coordination with the tax authorities and, if necessary, to obtain binding information.