Cryptocurrency losses in cases of fraud: Federal Fiscal Court (BFH) case law as a basis for argumentation

Arguments in favor of the taxpayer from the highest court rulings

Clients who have suffered cryptocurrency losses due to fraud regularly find themselves in a difficult tax situation: The tax authorities often reject the deductibility of these losses, arguing that no tax-relevant sale has occurred. However, the case law of the Federal Fiscal Court provides robust avenues for successfully challenging this position in suitable cases. This article summarizes the key arguments for tax advisors, lawyers, and compliance officers. A supplementary practical overview on the issue of, when losses from crypto fraud are tax deductible, you can find more information in our related feature article.

Tax classification of cryptocurrencies according to § 23 EStG

By judgment of 14.02.2023 (Ref. IX R 3/22) The Federal Fiscal Court has confirmed that cryptocurrencies are assets within the meaning of Section 23 of the German Income Tax Act (EStG). Profits and losses from the sale or exchange of cryptocurrencies can therefore constitute private sales transactions, provided the holding period for speculative transactions is observed. This ruling definitively clarifies the question of the fundamental taxability of crypto assets at the highest court level.

This classification is central to the further argumentation. Anyone who classifies cryptocurrencies as economic assets for tax purposes must consistently accept that their ultimate loss can also have tax consequences – provided the economic conditions for this are met. This is precisely where the lines of argument in favor of the taxpayer begin.

It is important to note that, according to Section 23 Paragraph 3 Sentence 7 of the German Income Tax Act (EStG), the offsetting of losses from private sales transactions is limited to similar types of income. Therefore, losses from crypto transactions can generally only be offset against gains from other private sales transactions. For clients who already realize ongoing crypto gains or have carried-forward gains from previous assessment periods, the recognition of a loss due to fraud has immediate tax implications. This situation must be examined in the initial engagement because it determines the economic relevance of the loss recognition in the specific case.

Economic perspective as the central argument

The Federal Fiscal Court consistently assesses tax matters according to their economic substance, not their purely civil-law form. This principle also underlies Section 39 of the German Fiscal Code (AO) on beneficial ownership, as well as Section 41 Paragraph 1 AO, according to which ineffective legal transactions can nevertheless be relevant for tax purposes insofar as the parties involved allow their economic outcome to occur.

Applied to crypto fraud cases, this means that anyone who transfers coins to a fake broker, a manipulated platform, or a phishing attacker and permanently loses their economic control has, economically speaking, carried out a transaction that is at least comparable to a sale. The fact that there is no legally valid purchase agreement does not preclude this economic assessment; rather, it is its typical application.

In disputes with the tax authorities, the economic perspective rarely proves to be a sure thing. It must be presented convincingly, linked to the specific facts of the case, and supported by solid evidence. Simply invoking the principle is insufficient; what matters is demonstrating which economic effects actually occurred, when they materialized, and why recovering the coins is impossible. This connection between legal theory and factual evidence is the real key to a successful argument.

Have this classification explicitly examined as a separate line of argument in every mandate – it is often overlooked by tax offices in practice.

Federal Fiscal Court ruling on final asset losses and bad debts

A second line of argument arises from the case law of the Federal Fiscal Court (BFH) regarding definitive losses of assets in capital investments. In several rulings, the BFH has recognized that even the definitive default on a capital claim or the devaluation of shares can be significant for tax purposes, despite the absence of a classic sale.

From this line of reasoning, it can be argued that the irreversible loss of cryptocurrencies due to fraud should also be treated as a final loss of assets from an economic perspective. However, this is contingent on the finality being demonstrably verifiable: as long as there are realistic chances of recovery, the tax authorities will reject recognition of the loss, citing the lack of finality.

Methodologically, it must be considered that the case law on definitive losses was primarily developed in the area of Section 20 of the German Income Tax Act (EStG) (income from capital assets), while cryptocurrencies, according to the Federal Fiscal Court's (BFH) case law, fall under Section 23 of the EStG. The transfer therefore does not occur through direct application, but rather as an argument based on analogy and valuation: If the legislator and the courts recognize definitive asset losses in the case of capital investments because they are economically equivalent to a sale, the same valuation standard can be applied to assets within the meaning of Section 23 of the EStG. This argument based on analogy must be thoroughly developed in the client engagement and secured against potential objections from the tax authorities.

Ability-to-pay principle and objective net principle

A third line of argument – one with constitutional implications – is based on the ability-to-pay principle and the objective net principle. The Federal Fiscal Court (BFH) consistently emphasizes that, for tax purposes, not only profits but also economically corresponding losses must be taken into account, insofar as they are attributable to the business sphere.

If profits from cryptocurrency transactions are fully taxed, it is objectively unconvincing to systematically exclude corresponding final losses. This asymmetry can also be challenged on constitutional grounds, particularly under the principle of equal treatment enshrined in Article 3, Paragraph 1 of the German Basic Law.

In arguments before the tax office and the tax court, it should be emphasized that denying the loss deduction effectively burdens the client solely with the profits from their crypto activities. Such a one-sided burden contradicts the fundamental principle of fair taxation. It cannot be justified by standardized considerations or practicalities, because modern blockchain forensics provides a reliable and verifiable account of the facts. The previously perhaps plausible assumption that crypto-related matters are structurally difficult to investigate and therefore justify blanket denials is no longer valid.

Have this constitutional classification specifically examined in complex cases – it can be a key argument in objection or legal proceedings, especially in cases involving higher amounts in dispute.

Overview of arguments in favor of the taxpayer

The individual lines of argument can be summarized in a streamlined sequence of examinations. The following should be regularly reviewed during the mandate:

• the ultimate loss of economic control over the coins,
• the irreversibility of the asset outflow, especially in the case of shut-down platforms,
• the economic comparability with a disposal loss,
• the principle of equal treatment according to Article 3 Paragraph 1 of the Basic Law,
• the ability-to-pay principle as the basis for asymmetry-free taxation,
• the objective net principle as a system-supporting element of income taxation.

These building blocks of argumentation are not effective in isolation, but only unfold their power in conjunction with a verifiable presentation of the facts. Without reliable documentation, every dogmatic argument remains abstract.

From a procedural standpoint, it's important to note that the argumentation should generally not be developed solely in court. A phased approach is advisable: first, a fully documented tax return with clearly quantified losses; if rejected, a timely objection within the one-month deadline; then, if necessary, a lawsuit before the tax court and – in cases of fundamental importance – an appeal to the Federal Fiscal Court. The earlier forensic evidence is integrated into this process, the stronger the argumentation will be at each stage of the proceedings.

Importance of forensic evidence preparation in legal proceedings

The central weakness of many cases is not the legal argumentation, but the factual basis. Without a complete investigation of the facts, neither the economic perspective nor the objective net principle applies. Tax authorities demand verifiable, technically verifiable evidence – and this is precisely where the forensic investigation to.

In the event of a dispute, the following components are generally required:

• a forensic blockchain analysis of all relevant transactions,
• a complete wallet tracking of the affected addresses,
• a complete transaction history including all bridges, mixers and token exchanges,
• the criminal complaint as a formal point of reference for the finality of the loss,
• the reconstruction of platform communication and economic processes,
• Documentation of asset outflows in a form usable by the tax office.

This preparation is not only important for tax proceedings, but also supports parallel civil and criminal proceedings. A properly established chain of evidence can be used in multiple legal proceedings.

Role of financial forensics in the mandate

Financial Forensics We support tax advisors, lawyers, and compliance officers in investigating complex cases of crypto fraud. Our focus is on creating robust, auditable documentation that effectively supports legal arguments. Typical services included in a mandate include:

• Forensic blockchain analysis of individual transactions and entire wallet movements,
• Reconstruction of branched transfer paths across multiple blockchains,
• Preparation of the results for tax offices, tax courts and law enforcement agencies,
• Preparation of tax-compliant reports as attachments to objections and legal actions,
• professional support in meetings with the tax authorities.

Financial forensics does not replace tax or legal advice. It provides a reliable factual basis upon which a tax advisor or lawyer can build their arguments.

In practice, a clear division of roles has proven effective: The tax advisor is responsible for the tax assessment and the handling of the proceedings with the tax authorities, the lawyer conducts the court or criminal proceedings, and forensic analysis provides both sides with the technical factual basis. This interface work best where forensic expertise is involved early on – ideally even before the tax return is filed, but at the latest at the start of the objection proceedings. Subsequent documentation is possible, but regularly requires more effort and, in case of doubt, weakens the evidentiary value. Further information on Legally compliant documentation for complex crypto transactions We have summarized the methodological requirements in a separate article.

When is it worthwhile to involve forensic expertise in a mandate?

Not every case requires a full forensic investigation. In clear-cut cases with manageable damages, a well-organized presentation of the facts by the client may suffice. However, as soon as the case becomes more complex, the situation changes.

The involvement of external forensic expertise is particularly useful when

• multiple wallets, platforms or blockchains are involved,
• the amount of damage has substantial tax relevance,
• Mixers, bridges, or atypical token constructs are involved,
• a criminal proceeding is running in parallel and double use of the evidence is possible,
• An objection or legal action is already pending and the tax office has rejected recognition.

In such situations, have the data forensically secured early on – subsequent reconstructions are more complex and in many cases incomplete.

Conclusion: Federal Fiscal Court (BFH) case law as leverage for the tax recognition of losses from crypto fraud

Recent case law from the Federal Fiscal Court provides clients with strong arguments to support their claims for losses due to cryptocurrency fraud. The economic perspective, the recognition of definitive asset losses, and the ability-to-pay and objective net principles form a system of argumentation that can lead to tax relief in suitable cases.

Crucially, legal arguments must be based on verifiable facts. Therefore, professionally conducted blockchain forensics is not an optional add-on, but rather, in complex cases, a prerequisite for the Federal Fiscal Court's (BFH) jurisprudence to be effectively applied. You can find specifically tailored information for legal practice – including court-admissible report formats – on our website. Financial Forensics for Lawyers.

FAQs – Frequently Asked Questions about Crypto Losses and Federal Fiscal Court Case Law