Tax assessment
Taxation is relative to your jurisdiction and must be handled accordingly. We do not offer tax advice, and recommend that you speak with an expert from your area.
Below are sample tax assessments of concrete economic consumptions of Circles (CRC) as well as suggestions for the Circles exchange accounting, based on German laws.
STEP 1: MINTING
Start account balance:
Helga: 0 Helga tokens
Nico: 0 Nico tokens
Process:
Helga and Nico (private persons) generate (mint) 720 Nico and Helga tokens each per month.
Final account balance:
Helga: 720 Helga tokens
Nico: 720 Nico tokens
QUESTION:
Is this process tax neutral and regulatorily clean?
ANSWER:
From the perspective of private individuals (Helga and Nico), the minting of tokens is a taxable inflow of tokens and the inflow is to be evaluated according to §22 Nr.3 EStG. "Minting" can be compared to "staking”. The value of the tokens can be determined by using CRC. Although the Helga and Nico tokens are not listed on any stock exchange, they can be exchanged at any time for CRC in the ratio 1:1.
If the value is 1 EUR per 10 CRC when the Nico and Helga tokens are mined, the inflow of Helga and Nico tokens is also valued at this value. Since the tokens were not purchased, no tax is due on their sale and the tokens can be sold tax-free or exchanged for CRC at any time. From a regulatory point of view, the process is unproblematic.
STEP 2: Service provision among private persons
Start account balance:
Helga: 1000 Helga tokens
Nico: 1000 Nico tokens
Process:
Helga asks Nico to water her flowers in her absence.
For this she pays 200 CRC.
Nico makes the best cupcakes in the neighborhood and Helga buys a plate for 200 CRC.
Final account balance:
Helga: 600 Helga tokens
Nico: 1000 Nico tokens, 400 Helga tokens.
QUESTION:
Is this income taxable for Nico? If Nico makes a lot of cupcakes and waters all the plants in the neighborhood during her vacation, but doesn't do it for a living, can Nico reach a high level of income that is taxable?
ANSWER:
It depends on the amount of income Nico earns for watering flowers and cupcakes: If Nico has a full-time job, he may earn up to 520 EUR (2023) per year tax-free as a sideline, § 46 para. 2 No. 1 EStG. If Nico provides services on a regular and permanent basis for a fee or consideration, he must register a business and must pay tax on his income. Under certain circumstances, he also has to pay sales tax if he exceeds the limits of the small entrepreneur according to §19 UstG (Kleinunternehmer). From a tax point of view, the cupcake sale will then be the main source of income and therefore represent a commercial activity. However, this is tax-free up to the basic allowance of 10,908 EUR per year (2023).
STEP 3: COMMERCIAL TRADE
Start account balance:
Helga: 2000 Helga tokens
Nico: 2000 Nico tokens
Circles Coop: 0 Nico / Helga tokens
Process:
Helga and Nico (private persons) each buy five vegetable crates from the Circles Coop (commercial) for 2000 CRC with a total value of 400 EUR.
Final account balance:
Helga: 0 Helga tokens
Nico: 0 Nico tokens
Circles Coop: 4000 CRC (2000 Nico tokens + 2000 Helga tokens)
QUESTIONS:
1) Is this process clean for regulatory purposes?
2) Which taxes are calculated here in the accounting of the Circles Coop?
3) What does the invoice from the Circles Coop to Nico look like?
4) What information does the tax advisor of the Circles Coop need to be able to make correct bookings?
ANSWER:
1) Yes, the only difference to a normal business transaction is that the goods are not paid in a fiat currency such as EUR, but in a complementary currency. This is not relevant for regulatory purposes.
2) As the LLC (GmbH) is a balance sheet company, the vegetable crates are removed from the assets of the LLC when sold. Since an exchange transaction is involved, the tokens are recognized in the balance sheet at the fair value of the vegetable crates in accordance with § 6 (6) p. 1 EstG. This results in a taxable profit.
3) When selling goods (vegetable crates) against complementary currencies, a fee (equaling the sales price) in the form of complementary currencies is incurred. No sales tax is incurred for the use of CRC for payment of the fee. On the other hand, the purchased goods or services are subject to sales tax as usual. That means that the basis of assessment is basically determined by the value of the respective complementary currency and thus the value associated with the fiat currency, which in turn results in the sales tax. Only the sale of complementary currencies against fiat money and the exchange of complementary currencies is tax-free according to the decision of the ECJ under § 4 No. 8 b UStG. On the invoice, the sales tax must be shown accordingly as in any normal invoice. The gross price of the vegetable crate in EUR will be converted to the value of CRC and displayed accordingly. The value in EUR must also be shown.
4) For the entries, the tax consultant must be able to understand the amount of CRC "collected" and the common value of the vegetable boxes at the moment of sale. Both are regularly shown on the invoice/receipt.
STEP 4: Service
Start account balance:
Circles Coop: 4000 CRC (2000 Helga tokens + 2000 Nico tokens)
Circle Startup Agency Association: 0 Nico tokens
Process:
Circle Startup Agency Association (economically oriented) writes a blog article for Circles Coop (trade) about the tax assessment of CRC for entrepreneurs and the association writes a service provider invoice to Circles Coop.
Final account balance:
Circles Coop: 0 CRC
Circle Startup Agency Association: 4000 CRC
QUESTION:
Do the same rules apply here for B2B (Business to Business) transfer as for B2C (Business to Consumer)?
ANSWER:
Yes, the same rules apply as for B2C. Invoice with value of the CRC in EUR and quantity of CRC. The VAT must be shown separately, including the quantity of CRC and the value in EUR.
STEP 5: Employment
Start account balance:
Helga: 1000 Helga tokens
Nico: 1000 Nico tokens
Circles Coop: 1000 CRC
Circle Startup Agency Association: 4000 CRC (2000 Helga tokens + 2000 Nico tokens)
Process:
Nico as an active board member of the Circle Startup Agency Association receives a monthly net salary of 1000 EUR. He accepts as salary payment 750 EUR and 2500 CRC.
Final account balance:
Helga: 1000 Helga tokens
Nico: 3500 CRC (2250 Nico tokens + 1250 Helga tokens)
Circles Coop: 1000 CRC
Circle Startup Agency Association.: 1500 CRC (750 Helga tokens + 750 Nico tokens)
QUESTION:
Can the association pay the salary of its employees partly in CRC, provided the employee accepts CRC?
ANSWER:
Basically yes, but the conditions should be specified accordingly in the employment contract. According to § 107 GewO para. 1 the salary must be paid in EUR. However, according to § 107 GewO para. 2, the salary can also include non-cash benefits in the amount of approximately 25%, i.e. 25% of the salary can be paid in CRC. It should be possible to determine the value of the CRC in EUR. It should also be noted that wage tax and social security contributions are to be paid in EUR depending on the salary.
STEP 6: Association members
Start account balance:
Helga: 1000 Helga tokens
Nico: 5000 CRC (3000 Nico tokens + 2000 Helga tokens)
Circle Startup Agency Association: 0 CRC
Process:
Helga and Nico (private persons) become members of the Circle Startup Agency Association and pay 300 CRC / month membership fees each and get votes for which projects are accepted into the association (e.g. new Circle Startup entrepreneurs), which are supported with the Circles membership fees.
Final account balance:
Helga: 700 Helga tokens
Nico: 4700 Nico tokens (2700 Nico tokens + 2000 Helga tokens)
Circle Startup Agency Association: 600 CRC (300 Nico tokens + 300 Helga tokens)
QUESTIONS:
1) Can the association also accept its membership fees in CRC?
2) Are there any taxes on the CRC membership fees?
ANSWER:
1) Yes, but according to § 58 No. 2 BGB (German Civil Code) the statutes of the association must contain provisions on whether and which contributions the members of the association are obliged to pay. The contributions do not necessarily have to consist of monetary contributions, but can also consist of e.g. contributions in kind. Accordingly, complementary currencies are to be evaluated as contributions.
2) If it concerns genuine member contributions (if the contribution is used for the fact that the association follows the total interests of all members and no achievement exchange with individual members comes off), the contributions thus serve the statutory community purposes, are not subjected to the value added tax. If, however, an exchange of services takes place, the services must be charged with value added tax. The details are complicated and in individual cases highly controversial, so that an exact examination may be necessary.
STEP 7: EXCHANGE CRC FOR EUR
Start account balance:
Circle Startup Agency Association: 600 CRC (300 Nico tokens + 300 Helga tokens)
Procedure:
The members of the Circle Startup Agency Association have agreed that an open source software project will be developed and exchange their 600 CRC on a decentralized stock exchange for 40 EUR at the Circles Coop, so that it can pay the employer's shares of its employed programmers and the taxes of the association in EUR.
Final account balance:
Circles Coop: 600 CRC (300 Nico tokens + 300 Helga tokens)
Circle Startup Agency Association: 40 EUR
QUESTIONS:
1) What happens fiscally on the level of the association (or another commercial person, such as a limited liability company or cooperative) that theoretically has a 20 EUR loss of exchange rate.
2) What happens for tax purposes at the level of Circles Coop when buying CRC tokens?
3) How is the exchange rate gain offset for tax purposes if Circles Coop exchanges the 600 CRC purchased (for 40 EUR) for a product or service of 600 CRC = 60 EUR in exchange for another service provider?
4) Which regulatory issues have to be considered for the EUR / CRC exchange?
ANSWER:
1) Depending on the value at which the 600 CRC have been received by the club, a loss in value may occur. For example, if the club receives 600 CRC (value 60 EUR) as membership fee and if the club sells 600 CRC (value 40 EUR) on the stock exchange, a tax-relevant loss of 20 EUR may occur.
2) Operating expenses at the value of the CRC (40 EUR) at the time of purchase of the tokens and receipt of "goods" (600 CRC token).
3) In this case Circles Coop would have a tax-relevant profit of 20 EUR when selling the 600 CRC at 60 EUR.
4) The use of CRC as a means of payment is unproblematic from a regulatory point of view. It will only become relevant when the Circles Coop makes itself generally available as a marketplace for the exchange of tokens. One can exchange Nico tokens for Helga tokens via the Circles Coop, for example. This fulfills the facts of the so-called proprietary trading and requires a license.
