The German Finance Ministry has officially recognised digital currency Bitcoin as a ‘unit of account’ which can be used for private transactions.
The approval means that that the ministry will now be able to tax users or creators of the four-year-old virtual money.
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The Ministry has not classified Bitcoins as e-money or a foreign currency but rather as a ‘financial instrument’ under German banking rules.
"It is more akin to private money that can be used in multilateral clearing circles," the Ministry said in a statement.
The Ministry added that any profit made from Bitcoin transactions will be subject to Germany’s 25% capital gains tax.
However, Bitcoins which are held for more than a year will be tax-free.
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By GlobalDataBitcoins, which have been in existence since 2008, is traded via online networks. They are created by software running a set of algorithms and are not controlled by a single company or government.
The Ministry clarified Bitcoin’s status in response to a question from Frank Schäffler, a member of the Parliament’s finance committee.
Schaeffler said the new ruling showed German authorities were preparing regulations on how to tax Bitcoin transactions.
"We should have competition in the production of money. I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction," said Schaeffler.
On 15 August 2013, PBI reported that New York Department of Financial Services (NYDFS) has issued subpoenas to several companies associated with bitcoin as part of an inquiry into business practices of the virtual currency industry.
