In a recent decision of 14 February 2023, the Federal Fiscal Court (Bundesfinanzhof, BFH), the highest German tax court, has ruled that privately held cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and Monero (XMR) are – notwithstanding the fact that there are no physical goods in which a traditional form of legal ownership can be established – taxable assets for German income tax purposes. As a consequence, any gains from their acquisition (against fiat currency or otherwise) and sale (or exchange) within a one-year period will be taxable (at the owner’s personal tax rate); if, however, the relevant cryptocurrency has been held for more than one year, any gains will be tax exempt. For these purposes, the holder of the “private key” will be considered as legal owner of the cryptocurrency. The tax treatment of a realization of an increase in value of cryptocurrencies is therefore, in Germany, substantially the same as for fiat currency.
By Daniel Knight and Oliver Herrmann
New licensing requirements for crypto service providers are coming, following a series of consultations launched last week by Treasurer, Jim Chalmers. The Government approach focuses on strengthening enforcement, bolstering consumer protection and ultimately establishing a new licensing framework.Read More
On 1 February, the UK Government published another consultation paper on the proposed regulation of business relating to cryptoassets in the UK. This is to seek views (by 30 April 2023) on the overall approach and policy direction, and includes a call for evidence to gather more pertinent information on decentralised finance. As such, the consultation does not contain details on any specific proposed rules. For example, the proposed cryptoasset-related regulated activities described in the consultation paper are stated to be illustrative of the sorts of activities the Government intends to regulate, rather than specific proposals. For further information on this consultation please see our fintech blog here.
By Jim Bulling and Anabelle Weinberg
1. Bitcoin plunges as FTX Trading files for bankruptcy – calls for more transparency from crypto exchanges
Bitcoin has plunged following the fall of FTX Trading (FTX). It remains unclear when or if traders will be able to recoup their money from FTX.
In response to the collapse of FTX and in an effort to retain confidence in their platforms, a number of large crypto exchanges have published Proof of Reserves showing that the levels of assets that they hold match their liabilities to customers.Read More
In the wake of the drawn out cryptocurrency market downturn, increased regulation of the sector seems inevitable. With nearly one million Australians transacting in cryptocurrencies last year, there have been widespread calls to enact additional protections for retail investors.Read More
The “Lummis-Gillibrand Responsible Financial Innovation Act” lays out a bold agenda for legal reform related to digital assets. Although a detailed summary of Bill is still forthcoming, here’s an abbreviated summary of 10 impactful provisions. For a more fulsome summary, see our full posting on the K&L Gates FinTech Law Blog.
- Applies generally to incorporated and licensed entities, but unincorporated DAOs, users of digital assets, and DeFi protocols would not be affected.
- Excludes a gain or loss of $200 or less in transactions for “goods or services” from gross income for federal income tax purposes.
- Requires regulated entities to make certain transaction-specific disclosures to consumers.
- Introduces the “ancillary asset” concept that splits the digital asset from any promises made in an investment contract, and delegates jurisdiction over ancillary assets to the CFTC.
- Authorizes spot crypto asset exchanges to register with the CFTC.
- Corrects the provision of the 2021 Infrastructure Investment and Jobs Act (HR 3684) that expanded the tax law definition of Broker to include any “person who… is responsible for … effectuating transfer of digital assets on behalf of another person.”
- Clarifies that staking proceeds are not a part of gross income until the taxpayer “exercises dominion” over them.
- Permits depository institutions to issue payment stablecoins subject to specific reserve and redemption requirements.
- Prohibits banks from using reputation risk in its examination ratings and requires appropriate reasons for requesting the termination of a customer account.
- Directs state regulators to adopt uniform money transmitter license requirements for digital asset transactions.
This Bill would radically change the way that regulated entities interact with digital assets in the U.S.. While the Bill is unlikely to pass this year, it is the product of significant bipartisan effort, and will likely lead to significant regulation of digital assets in the coming years.
Stay tuned for more in-depth coverage of the securities law and commodities law implications of amendments suggested in the Lummis-Gillibrand Bill.