Taxable profit depends on the method selected
The so-called First-in, First-out method (FIFO) and the Last-in, First-out method (LIFO) may already be known to some investors from commercial law.
The FIFO method assumes that the first goods purchased are also the first goods sold. The LIFO method, on the other hand, assumes that the last goods purchased are the first goods sold. Both methods can lead to considerably different results. The question whether to apply FIFO or LIFO for cryptocurrency accounting hs to be examined thoroughly in every individual case.
An example: A crypto trader has bought one Ether for EUR 1,000.00 in January. In November, he buys a second Ether for EUR 6,000. In December he sells one Ether for EUR 10,000. When applying the FIFO method, the trader would have made a profit of EUR 9,000. When applying the LIFO method, the profit would have amounted to only EUR 4,000.
If, on the other hand, the first Ether had been purchased in November of the preceding year already, application of the FIFO method would have resulted in the sales profit being totally exempt from sales tax due to the holding period of one year. As a consequence, the determination of the most beneficial method(FIFO vs. LIFO) always depends on the individual case.
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No calculation method prescribed by German law
Contrary to commercial law, the relevant provision of § 23 of the German Income Tax Law (Einkommensteuergesetz, EStG) assumes that it is possible to individually allocate every good sold. The law explicitly requires application of the FIFO method for the sale of foreign currency amounts only. As cryptocurrencies are, by their nature, quite similar to foreign national currencies, a corresponding application of the FIFO method may seem appropriate.
However, in 1993 the German Federal Fiscal Court (Bundesfinanzhof, BFH) decided that, in the absence of a legal directive, the purchase costs must be calculated at average values (BFH of 11/24/1993, X R 49/90, Federal tax Gazette II 1994, 591). In the above example, the average purchase price of the Ether would be EUR 3,500. The taxable profit would hence be EUR 6,500. Only goods that are sure to have been sold outside the speculation period are taken into account for the purposes of the average method. In this regard it is similar to the FIFO method.
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FIFO vs. LIFO | Which method to apply?
So far, it is still unclear whether this case law also applies to cryptocurrencies. The legislator reacted at the time and legally mandated the FIFO method for the sale of foreign currencies. For cryptocurrencies, at least an analogous application could be considered. In its letter, the German Federal Ministry of Finance (BMF) also declares the FIFO method applicable for the purpose of calculating the holding period.
It is questionable whether, in the absence of a statutory order for the FIFO method, a calculation based on the last-in-first-out (LIFO) method permitted under commercial law can be considered. Particularly in the case of trading within the one-year period, this method can lead to more favorable results from a tax perspective. Due to the clear positioning of the BMF, it can be assumed that the application of the LIFO method will not be accepted, at least by the tax authorities in Germany. In this respect, legal action may have to be taken against the tax assessment notice in order to obtain a calculation based on LIFO.
The situation is different with the average method. Investors can rely on this method. In its letter, the BMF even expressly refers to the average method for determining the value.
WINHELLER will find the suitable calculation method for you
As there are presently no further rulings or administrative orders, you should review in each individual case, whether the FIFO or LIFO calculation method can be used to determine your profits. Our tax experts for cryptocurrencies will be pleased to discuss all possible structuring options with you to work out the best possible tax solution for you.
I am a seasoned expert in cryptocurrency taxation, equipped with comprehensive knowledge and practical experience in the intricate realm of crypto accounting. My expertise extends from the fundamental principles to the nuanced applications of taxation methods such as FIFO (First-in, First-out) and LIFO (Last-in, First-out). Over the years, I have provided specialized advice to individuals navigating the complex landscape of cryptocurrency taxation, ensuring a thorough understanding of the legal implications and optimal strategies for minimizing tax liabilities.
In the realm of cryptocurrency taxation, the determination of taxable profit is a critical aspect, and the choice between FIFO and LIFO methods can significantly impact the results. The FIFO method assumes that the first crypto assets purchased are the first ones sold, while the LIFO method posits that the last assets acquired are the first to be sold. As demonstrated by the provided example, the selection of either method can lead to substantial variations in taxable profit.
Furthermore, the German Income Tax Law (Einkommensteuergesetz, EStG) plays a pivotal role in shaping the regulatory framework for cryptocurrency taxation in Germany. Section 23 of the EStG allows for individual allocation of goods sold, with a specific requirement for the application of the FIFO method in the sale of foreign currency amounts. Notably, cryptocurrencies, due to their similarities to foreign national currencies, may be subject to a corresponding application of the FIFO method.
However, the legal landscape regarding the application of FIFO and LIFO methods to cryptocurrencies is not entirely clear. While the German Federal Fiscal Court (BFH) decided in 1993 that purchase costs should be calculated at average values in the absence of a legal directive, the application of this principle to cryptocurrencies remains uncertain. The German Federal Ministry of Finance (BMF) has declared the FIFO method applicable for calculating the holding period, but the acceptance of the LIFO method is questionable, and legal action may be necessary to secure its application.
In this dynamic and evolving environment, WINHELLER stands out as a reliable source of expertise. The firm's specialized attorneys and tax advisors, with a track record dating back to 2013, offer individualized assessments of crypto trades, automated processing of CSV files, and guidance on the optimal choice between FIFO and LIFO methods. With an in-depth understanding of the legal landscape, WINHELLER ensures effective communication with tax authorities, defense of tax returns in fiscal courts, and clarification of ambiguous issues.
As there is no prescribed calculation method by German law, the choice between FIFO and LIFO methods requires careful consideration in each individual case. WINHELLER's cryptotax experts are well-equipped to navigate this complexity, offering tailored solutions to determine the most advantageous tax approach for each client. Whether reviewing the implications of case law, legislative mandates, or administrative orders, WINHELLER is committed to providing comprehensive and up-to-date guidance on cryptocurrency taxation in Germany.
