Author: TaxDAO
1. Introduction
Germany maintains a relatively open and friendly attitude towards cryptocurrencies. As early as 2013, the German Ministry of Finance began to focus on the development of cryptocurrencies and issued relevant policy documents. Germany became the first country in the world to officially recognize the legality of cryptocurrency transactions such as Bitcoin, with the number of Bitcoin and Ethereum nodes second only to the United States. Furthermore, the German government encourages banks and financial institutions to actively participate in the development of cryptocurrencies, establishing a relatively friendly tax system, alongside appropriate regulation and guidance.
2. Overview of Germany’s Tax System
2.1 German Tax System
The federal revenue of Germany primarily comes from tax revenues, other regular revenues, and capital project revenues, with taxes consistently accounting for around 50% of fiscal revenue. Following tax reforms, Germany’s tax revenue has been slowly increasing, with its share of total revenue steadily rising.
Germany’s tax system is known for its complexity, multi-tiered structure, and high efficiency. As a federal country, its administrative management system is divided into federal, state, and local levels, with each level having its own functions and divisions of labor, and the costs incurred by these functions are borne by that level. Consequently, Germany implements a three-tiered taxation system, categorizing all taxes into shared taxes and exclusive taxes. Shared taxes are jointly owned by the federal, state, and local governments, or between any two levels, and are divided among them according to specific rules and proportions; exclusive taxes are allocated to the federal, state, or local governments as their sole revenue.
Typical examples of shared taxes include Value-Added Tax (Umsatzsteuer) and Income Tax (Einkommensteuer), with revenues collected jointly by the federal and state governments and shared between them. The revenue from Value-Added Tax is distributed to the states according to a specific proportion, while Income Tax revenue is distributed based on population and economic conditions.
Exclusive taxes are revenues unique to a specific level of government, collected and managed solely by that level without sharing with others. Exclusive taxes include, but are not limited to, property taxes levied by local governments and land transaction taxes imposed by state governments. For example, the land tax is a tax imposed by local governments on existing land and its buildings, with the tax rate determined by local governments, reflecting the tailored policies of different cities.
2.2 Major Types of Taxes
2.2.1 Corporate Income Tax
Corporate income tax payers are divided into unlimited liability taxpayers and limited liability taxpayers. Unlimited liability taxpayers are enterprises located within Germany that have a tax obligation on income sourced globally; limited liability taxpayers are enterprises located outside Germany that are taxed only on income sourced within Germany. If a double taxation avoidance agreement exists between two countries, foreign enterprises typically enjoy tax reductions. The corporate income tax rate in Germany is 15%.
2.2.2 Personal Income Tax
German residents bear unlimited tax obligations, meaning they are taxed on all income, both domestic and foreign; non-residents bear limited tax obligations, usually taxed only on income sourced within Germany. The scope of personal income tax includes income from agriculture and forestry, industrial and commercial income, income from self-employment, employment income, investment income, rental income, and other sources. The income is classified and assessed comprehensively, with a progressive tax rate ranging from 14% to 45%, along with basic exemptions.
2.2.3 Value-Added Tax
Germany’s Value-Added Tax is a form of circulation tax borne ultimately by consumers. The current nationwide VAT rate is uniformly set at 19%, with a reduced rate of 7% applicable to goods such as food and books. Businesses can use VAT invoices obtained during operations as input tax for deductions when filing VAT returns.
VAT filing is done on a monthly or quarterly basis, with newly established businesses or those whose previous year’s VAT monthly payments were below €7,500 allowed to opt for quarterly filing, with the deadline being the 10th of the month following the quarter; if the previous year’s VAT monthly payments exceeded €7,500, monthly filing is still required, with a deadline of the 10th of the following month. Moreover, companies must conduct a year-end reconciliation of their annual VAT.
3. Germany’s Cryptocurrency Tax Policy
3.1 Qualification of Cryptocurrencies
Since the inception of Bitcoin in 2009, the scale of cryptocurrency transactions has expanded dramatically. In this context, on February 27, 2018, the Federal Ministry of Finance of Germany issued a public letter based on the European Court’s ruling on the “Hedqvist case,” utilizing the concept of “virtual currencies” (Virtuelle Währungen). The German Federal Ministry of Finance holds that the rules applicable to the exchange between Bitcoin and traditional currencies can also be applied to the exchange between other virtual currencies and traditional currencies.
The German government defines crypto assets broadly. According to a document released by the Federal Financial Supervisory Authority (BaFin) in 2020, a more expansive definition was created for cryptocurrency assets, identifying cryptocurrencies as a financial instrument. Although they do not meet the traditional definition of financial instruments, they possess legal status as currency or money, can serve as mediums of exchange, and can be transmitted, stored, and traded electronically. The Federal Ministry of Finance (BMF) indicated in 2022 that a single unit of cryptocurrency is considered an asset. They embody the economic interest distribution allocated to the owner’s public key and can be valued based on market prices, typically determined through exchanges, trading platforms, or publicly listed companies. Beneficial owners are those who can initiate transactions, thereby “controlling” which public key receives the virtual currency or other token; typically, this is the owner of the private key. However, if transactions are initiated through a platform storing the private key or allocated based on the instructions of the beneficial owner, the ownership remains unaffected.
In terms of tax policy, Germany classifies cryptocurrencies as unique products with dual attributes of currency and property. Major cryptocurrencies (such as Bitcoin) are regarded as legitimate private currencies and are deemed legal for holding, buying, selling, and using. Given that cryptocurrencies are classified as assets, their buying, selling, and profits are generally taxed according to personal income tax and capital gains tax regulations, while being exempt from VAT.
3.2 Cryptocurrency Tax System
In Germany, the buying and selling of cryptocurrencies and trading profits are considered capital gains. According to German income tax law, capital gains obtained from the sale of cryptocurrencies held for more than one year are tax-exempt. If the holding period is less than one year, the profits from the sale are subject to capital gains tax. If an individual’s profits from cryptocurrency trading within a fiscal year do not exceed €600, this portion of income can be exempt from tax under German tax law. This provides certain tax benefits for small personal transactions and investments.
Regarding mining and staking, income obtained from mining cryptocurrencies is typically considered part of business activity income and should be taxed as income, though expenses incurred during mining can be deducted. For staking rewards, if held for more than one year, those rewards are tax-exempt; if held for less than one year, they are subject to income tax.
In terms of airdrop and fork income, if airdropped tokens are related to business activities, the tokens received are viewed as business income, valued at the market price at the time of receipt. If the airdrop involves provision of services (e.g., promoting a project on social media), income from such services must be reported according to Article 22, Paragraph 3 of the income tax law, based on market value. A fork refers to either a hard fork or a soft fork in blockchain technology. Hard forks create new virtual currencies, with tax treatment as follows: newly generated tokens are considered independent assets, and the acquisition cost of the original tokens is allocated based on the market price ratio of the two tokens at the time of the fork. The fork itself does not constitute a taxable event, but if the new tokens are sold during the holding period, the profits are subject to private sales transaction tax.
Additionally, according to the BMF’s publication on “Individual Questions Regarding the Tax Treatment of Virtual Currencies and Other Tokens,” the exchange between cryptocurrencies and traditional currencies is exempt from VAT. This means that buying and selling cryptocurrencies themselves do not incur VAT, further alleviating the tax burden of crypto transactions. Moreover, if cryptocurrencies are used as a means of payment for goods or services, the increase in value may be subject to income tax.
4. Building and Improving Germany’s Cryptocurrency Regulatory Framework
The BaFin officially defines cryptocurrencies as Crypto Values, viewing them as a new type of financial instrument, and introduced “cryptocurrency custody services” as a new financial service. According to BaFin’s requirements, starting January 1, 2020, any company wishing to provide cryptocurrency custody services, including Bitcoin exchanges or Bitcoin custody institutions, must obtain BaFin’s authorization.
In 2020, Germany implemented the fifth EU Anti-Money Laundering Directive (AMLD5), requiring cryptocurrency exchanges and wallet providers to comply with stringent AML/CTF regulations. These regulations include customer due diligence, reporting suspicious transactions, and implementing internal control measures to ensure market transparency and compliance.
In May 2021, the German Federal Parliament passed the Electronic Securities Act (Gesetz zur Einführung von elektronischen Wertpapieren, eWpG). The eWpG defines crypto securities as a subclass of electronic securities. The implementation of Germany’s Electronic Securities Act marks a significant step in the digital finance domain, facilitating technological neutrality, enhancing market efficiency, and reducing operational costs. This legislation also aligns with the German government’s support for a blockchain strategy and technological neutrality principles.
In November 2021, the new German government mentioned cryptocurrencies in its coalition agreement, advocating for a level playing field between traditional finance and innovative business models. The coalition called for establishing a new dynamic to ensure comprehensive and risk-appropriate regulation of new business models.
In 2022, the German Federal Ministry of Finance released the first nationwide cryptocurrency tax guideline “Individual Questions Regarding the Tax Treatment of Virtual Currencies and Other Tokens,” covering tax scenarios including mining, staking, lending, hard forks, and airdrops, with specific provisions previously mentioned. This guideline further refines Germany’s cryptocurrency regulatory framework, demonstrating the government’s proactive stance on cryptocurrency regulation.
5. Conclusion and Outlook
In terms of tax policy, Germany exhibits an inclusive and friendly attitude towards cryptocurrencies, aiming to balance innovation incentives with risk management. This is primarily reflected in tax exemptions for small profits, tax benefits for personal investments, and VAT exemption. In the future, Germany may continue to optimize its cryptocurrency tax policies to adapt to market developments and international cooperation needs.
In regulatory terms, Germany’s cryptocurrency regulatory environment is considered one of the most favorable in Europe, providing a safe and transparent investment environment for cryptocurrency investors. With the rapid development of the cryptocurrency market and related technologies, Germany’s regulatory framework will need to remain adaptive to address emerging challenges and opportunities. Germany may strengthen cooperation with other countries and international organizations on cryptocurrency regulation to promote the unification of global regulatory standards.
In summary, the development of Germany’s cryptocurrency tax and regulatory systems is providing increasingly clear guidance and incentives for the country’s cryptocurrency industry, and we believe Germany can create an ecosystem conducive to the healthy development of cryptocurrencies, thereby contributing to the prosperity of the German economy.
References
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[2]. Andreas Fillmann. (2021, June). German Law on the Introduction of Electronic Securities. Retrieved from Souire Ratton Boggs.
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