What is the capital gains tax for digital assets in Europe?

IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. Businesses should be sure to consult a professional tax advisor before making any investment decisions.

Getting taxes right is key to any legitimate business, but it can be complicated or confusing where cryptocurrency and digital assets are involved. Different jurisdictions have very different rules when it comes to capital gains tax for cryptocurrency, which can add to the complexity. In this blog, we will outline the rules as they stand in the UK and some EU countries, focusing on Germany, to help businesses understand the taxation rules that apply to their cryptocurrency business accounts

READ: The complete guide to cryptocurrency accounts for small businesses

As digital assets become a more mainstream investment option, tax authorities across the globe are beginning to pay greater attention to gains from crypto investments. In most jurisdictions, capital gains tax, corporation tax or income tax applies to digital assets, so all businesses with holdings in cryptocurrency must familiarise themselves with the laws of their jurisdiction to avoid getting caught out.

Digital asset tax in the UK

In the UK, Her Majesty’s Revenue and Customs (HMRC) - the local tax authority - has issued guidance for filing taxes on cryptocurrency and digital assets. These rules group cryptocurrency assets into four main categories:

  • Exchange tokens: These are intended to be used as a means of payment. An example is the most well-known token of all - Bitcoin.
  • Utility tokens: Tokens that provide the holder with access to particular goods or services on a platform, typically using distributed ledger technology (DLT).
  • Security tokens: Tokens that provide the holder with particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
  • Stablecoins: Digital-assets that are pegged to the value of fiat money (such as USD Coin (USDC) and USD Tether (USDT), both of which are pegged to the US dollar) or other assets.

Digital assets in the UK are classed as an intangible asset. If a company makes a chargeable gain from selling digital assets which it classifies as either:

  • An intangible asset for accounting purposes
  • An intangible fixed asset that has been created or acquired by a company for use on a continuing basis

Then this will be subject to corporate tax rather than capital gains tax (CGT). The main rate of corporate tax in the UK is currently 19%.

Companies trading with the frequency and sophistication to be considered a trader will have to pay trading income tax, which could range from 0% to 46% depending on the amount of income and where the trader lives in the country.

A UK based business could have to pay corporate tax on profits it makes from:

  • Doing business (trading income)
  • Investment income and gains (loan relationship)
  • Chargeable gain on disposal of assets (tangible and intangible)

Any gains from selling or swapping exchange tokens to another cryptocurrency or token by a company or corporate member of a partnership would incur corporate tax, while sole traders or individual partners would pay CGT. It is, therefore, important to consider the type of entity that the company is registered as, and potentially even weigh up the possibility of changing this to reduce the tax burden. 

READ: What are the pros and cons of investing in crypto for businesses?

For tax purposes, digital assets must be converted to Pounds Sterling, since they are not considered currencies in the UK. The conversion must be done on an appropriate and consistent basis. Gains or profit from cryptocurrency activities must be recorded in the company’s tax returns. 

Meanwhile, for individuals HODLing digital assets as a personal investment, CGT applies, i.e. any gains on the initial investment will be taxed above the personal allowance. This is £12,300 for the 2020/21 tax year. CGT in the UK for individuals is either 10% or 20%, depending on a person’s income tax bracket. 

Digital asset tax in the EU

In the EU, the situation is even more complicated, since cryptocurrency and digital asset taxation rules are different in each European country. Digital assets can be taxed under capital gains tax, income tax or VAT and the tax rates can be anything from 0% to 50%, depending on the jurisdiction.

Generally, Portugal, Malta, Slovenia and Germany are currently seen as some of the best locations for individual investors in the EU. However, for businesses, the situation can be quite different. 

For example, Slovenia charges 0% on profits made from digital assets by individual investors, but businesses could face taxes of up to 50% if they are not exempt from CGT. Portugal however, taxes crypto activities only for professional traders, while Romania has a flat 10% rate of either income tax or CGT on gains made from digital assets.

Meanwhile, many will find it a surprise that Germany is seen as a tax haven for individual investors in digital assets. This is because Bitcoin and other cryptocurrencies are seen as “private money”, which comes with some tax exemptions. For example, if capital gains are no more than €600 in a tax year, or if the crypto has been held for more than a year (for example, invested in a DeFi project), then it is exempt from tax. 

However, for businesses, the situation is less favorable. Businesses that hold cryptocurrencies as business assets are liable to pay trade tax. Sadly, the tax exemption after one year of holding also doesn’t apply.

Businesses in Germany are taxed depending on the type of legal entity. For example, partnerships are subject to income tax (the same as for individuals, which ranges from 0% to 45%), while limited liability corporations, public companies and other corporate entities are all subject to corporate taxes on their digital assets. As in the UK, the legal entity therefore matters.

When it comes to VAT treatment of payments of digital assets to corporations, the rules are unclear, though many German tax lawyers advise that VAT should not be payable on exchanges of digital assets for goods and services.

Help with digital asset tax reporting

As readers have no doubt gathered, taxation of digital assets is complicated, disjointed and subject to change. It can also be difficult to calculate taxes if a high number of trades have taken place during the tax year. As such, it can be helpful to resort to companies or services that help businesses navigate this maze. 

READ: What are the best tax planning strategies for businesses investing in cryptocurrency?

There are a number of tax calculators and accounting tools on the market that connect directly to digital asset business accounts to help track the performance of assets, with this information then used to generate reports for tax filing purposes. This includes accounting tools such as SoftLedger and Cryptio, which can convert digital asset transactions into usable data for accounting purposes; as well as tax calculators such as TokenTax, Zenledger, Taxbit and Cointracking.info. 

With the help of these accounting tools, and preferably the advice of an accountant with experience in digital asset taxation, businesses across Europe and the UK will be well on their way to earning attractive, legal income from digital assets. Given the complexity of the situation and the constantly changing landscape, however, professional tax advice is highly recommended.

Are you interested in a business account that can return up to 20% APY? Sign up for a YIELD App account today!

Read More

Related Articles

No items found.