For a long time, we have known bitcoin as a financial instrument in Germany. However, in September, the Berlin Court of Appeal faulted this categorization citing the German Banking Act.
The case involved an administrator of a local exchange who had been charged with dealing with financial instruments without a banking permit from the Federal Financial Supervisory Authority (BaFin). Prior to the ruling, BaFin had classified bitcoin as a financial instrument. Subsequently, the Berlin-Tiergarten Local Court, a lower court had found the defendant guilty of the offense, largely due to BaFin’s error in categorization.
At the center of the matter was the legal status of bitcoin. However, the Berlin Court of the appeal held that the law, as asserted by BaFin did not extend to bitcoin since it was not issued by the central bank or any other public authority. The court noted that BaFin had ignored other banking acts when it made the decision to put bitcoin under such law.
BaFin held that bitcoin is a complementary currency and therefore a unit of account, a conclusion which is faulty according to the appeals court.
For this reason, the Berlin Court of appeal revoked the ruling of the lower court and set the suspect free.
Section 1 (32) of the Banking Act says that “anyone wishing to conduct banking business or to provide financial services in Germany commercially or on a scale that requires a commercially organised business undertaking requires a written license.”
The application of the Banking act according to the Berlin Court of Appeal is precluded. The reason is that Bitcoins within the meaning of Section 1(11) are not a financial instrument.
Bitcoin trading or operating a corresponding trading platform cannot be subject to the BaFin obligation to obtain permits according to the Court of Appeal, reading section 1(32). In this case, Bitcoin trading is not a criminal offense as per section 1(54).
Furthermore, the court noted that Bitcoin is neither issued by a central bank nor by a public authority. Additionally, considering bitcoin’s volatility does not meet an essential requirement of units of account, therefore allow for the use of Bitcoin to be compared with goods or services.
Bitcoin is generally recognized in the EU but there is a divergence in how it is treated in different jurisdictions.
Some countries view it as a currency or private money and therefore not subject to VAT. This includes Germany. Others see it as a form of barter in which case it is subject to VAT. Countries that tax bitcoin transactions include Poland.
Germany generally treads lightly in this area compared to other countries such as the US. The IRS, for instance, treats bitcoin as property and therefore subject to the capital gains tax.