Crypto assets such as cryptocurrencies and crypto art are digital assets which can be traded. The owners of these are recorded transparently and can be traced in a blockchain.

The blockchain is based on distributed ledger technology. Data is not stored in one location, instead it is distributed across a large number of computers. Transactions between participants are recorded in ‘ledgers’, also known as blockchains, which remain publicly accessible.

Blockchain, as a term, is derived from the growing number of information blocks that are continuously linked together. Each new block contains all the information of the previous blocks – similar to our DNA – making the data unchangeable and traceable. 

Tokens are stored in the blockchain. The person to whom a token is assigned is also entered in the blockchain. 

What exactly these tokens represent can be very diverse – from digital currencies to works of art or access rights.

Cryptocurrencies or ‘currency tokens’ are ‘fungible tokens’. This means they are interchangeable and can be replaced by other tokens of the same type and quantity. Cryptocurrencies are generally based on blockchain technology. This makes it possible to transfer and store values digitally without centralised authorities such as banks. Well-known examples are Bitcoin and Ethereum.

Crypto art involves non-fungible tokens (NFTs). They cannot be exchanged on a one-to-one basis. Each NFT has distinct attributes that differentiate it from others, making it one-of-a-kind.

Crypto assets are generally attributed for tax purposes to the person who holds the private key. This grants a user the right to dispose of the crypto assets at a given address. According to Germany’s Federal Tax Court, the ownership of the private key is associated with the “quasi-civil law” ownership relevant for tax law within the meaning of Sec. 39(1) of the German General Tax Code (AO). 

If several people have access to a private key, it can become unclear who is the owner for tax purposes. In such cases, investors should ensure that tax ownership is clearly clarified and, if necessary, regulated by a clarification agreement, for example.

Germany’s Federal Tax Court ruling of 14 February 2023 was game-changing for the income tax treatment of crypto assets. It was the first time the Federal Tax Court at the highest level that virtual assets such as Bitcoin are considered assets within the meaning of tax law and are therefore subject to income tax. 

Profits from the sale of crypto assets are generally taxable if the sale takes place within the one-year speculation period after acquisition (Sec. 23(1) sentence 1 no. 2 sentence 1 of the German Income Tax Act (EStG)).

In certain cases, crypto transactions can be categorised as commercial. This depends on the type and scope of the activities.

Yes, crypto assets can be inherited. The private key that grants a user the right to dispose the tokens in the blockchain is the relevant reference object under inheritance law.

There are a number of aspects to consider when succession planning for crypto assets. Firstly, virtual assets are also subject to inheritance tax and are generally valued at their market value at the time the tax is triggered.

Due to the high volatility of crypto assets, there is a risk that their value may fall so sharply between the time the tax is triggered and the actual payment of inheritance tax that the assets potentially become of insufficient value to cover the amount of tax owed. It is therefore important to ensure the estate’s ability to act promptly by guaranteeing access to the private key (or wallet) at all times.

In order to give the heirs prompt access to the digital estate, it is advisable to create a digital provision folder that contains all the necessary access and information. 

Crypto art brings with it additional special features that must also be taken into account as part of succession planning.

Please feel free to contact us with any question: krypto@fgs.de