Author: TaxDAO
1. Introduction
Germany's attitude towards cryptocurrencies is relatively open and friendly. As early as 2013, the German Ministry of Finance began to pay attention to the development of cryptocurrencies and issued relevant policy documents. Germany is the first country in the world to officially recognize the legality of Bitcoin and other cryptocurrency transactions, and the number of Bitcoin and Ethereum nodes is second only to the United States. In addition, the German government also encourages the banking industry and financial institutions to actively participate in the development of cryptocurrencies, formulates a relatively friendly tax system, and supervises and guides it accordingly.
2. Overview of Germany's Basic Tax System
2.1 German Tax System
The fiscal revenue of the Federal Republic of Germany mainly comes from tax revenue, other regular revenue and capital project revenue. Taxation has always been the main source of fiscal revenue, accounting for about 50%. After the tax system reform, Germany's tax revenue has been growing slowly, and the proportion of fiscal revenue has steadily increased.
Germany's tax system is known for its complexity, multi-level structure and high efficiency. Germany is a federal country with an administrative system divided into three levels: federal, state and local. Each administrative level has its own functions and division of labor, and the expenses incurred in performing these functions are also borne by it. Therefore, Germany implements a three-level taxation system of federal, state and local governments, that is, all taxes are divided into two categories: shared taxes and exclusive taxes. Shared taxes are shared by the federal, state and local governments or two of them, and are divided among the governments at all levels according to certain rules and proportions; exclusive taxes are respectively allocated to the federal, state or local governments as their exclusive income.
Typical representatives of shared taxes include value-added tax (Umsatzsteuer) and income tax (Einkommensteuer), the revenues of which are jointly collected by the federal government and state governments and shared between them. The revenues from value-added tax are distributed to the states according to a certain proportion, while the revenues from income tax are distributed according to population and economic conditions.
Exclusive taxes are exclusive revenues of a certain level of government, which are only collected and managed by that level of government and are not shared with other governments. Exclusive taxes include, but are not limited to, local government real estate taxes and state government land transaction taxes. For example, land tax is a tax levied by local governments on stock land and its ground buildings. The tax rate is determined by local governments, which reflects the characteristics of city-specific policies.
2.2 Main types of taxes
2.2.1 Corporate income tax
Corporate income tax payers are divided into unlimited obligation taxpayers and limited obligation taxpayers. Unlimited obligation taxpayers, that is, companies located in Germany, are subject to tax obligations on income from all over the world; limited obligation taxpayers, that is, companies located outside Germany, are subject to tax obligations only on income from Germany. If a double taxation avoidance agreement is signed between the two countries, foreign companies can usually enjoy tax reductions and exemptions. The German corporate income tax rate is 15%.
2.2.2 Personal Income Tax
German residents have unlimited tax obligations, that is, all their domestic and foreign income is taxed; non-German residents have limited tax obligations, usually only paying taxes on their income in Germany. The scope of personal income tax collection includes: income from agriculture and forestry, income from industry and commerce, income from self-employment, income from employment, investment income, rental income and other income. The income tax rate is progressive, ranging from 14% to 45%, with basic exemptions.
2.2.3 Value Added Tax
Germany's value added tax is a turnover tax, and the final tax burden is borne by consumers. The current value added tax rate is a unified 19% nationwide, and a preferential tax rate of 7% applies to goods such as food and books. The value added tax invoices obtained by enterprises in the course of operation can be deducted as input tax when declaring value added tax.
VAT declaration is divided into monthly declaration and quarterly declaration. Newly established enterprises or enterprises whose monthly VAT payment in the previous year is less than 7,500 euros can choose to declare on a quarterly basis, and the deadline for declaration is the 10th of the month following the end of the quarter; if the monthly VAT payment in the previous year exceeds 7,500 euros, monthly declaration is still required, and the deadline for declaration is the 10th of the following month. In addition, enterprises are required to settle the annual VAT at the end of the year.
3. German Cryptocurrency Tax Policy
3.1 Qualitative Analysis of Cryptocurrency
Since the birth of Bitcoin in 2009, the scale of transactions involving cryptocurrencies has expanded dramatically. In this context, on February 27, 2018, the German Federal Ministry of Finance issued a public letter based on the European Court's judgment on the "Hedqvist case". The German Federal Ministry of Finance used the concept of "virtual currency" (Virtuelle Währungen), that is, the German Federal Ministry of Finance believes 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 has a relatively broad definition of crypto assets. According to a document released by the German Federal Financial Supervisory Authority (BaFin) in 2020, it created a broader definition for cryptocurrency assets. As a financial instrument, although cryptocurrencies do not meet the definition of traditional financial instruments, they have the legal status of currency or money, can be used as a medium of exchange, and can be transmitted, stored and traded electronically. The German Federal Ministry of Finance (BMF) pointed out in 2022 that individual units of cryptocurrencies are assets. They embody the ability to assign the economic benefits assigned to the public key of the owner to another public key. They can be valued based on market prices, which can usually be determined by exchanges, trading platforms or listed companies. The beneficial owner is the person who can initiate transactions and thus "control" which public key a virtual currency or other token is assigned to. Typically, this is the owner of the private key. However, if the transaction is initiated through a platform that stores the private key or is assigned according to the instructions of the beneficial owner, the attribution is not affected. [1]
In terms of tax policy, Germany defines cryptocurrencies as special products with dual attributes of currency and property. Major cryptocurrencies (such as Bitcoin) are regarded as legal private currencies rather than legal tender. Holding, buying, selling and using cryptocurrencies are legal. At the same time, since cryptocurrencies are assets, their purchases and profits are usually taxed according to personal income tax and capital gains tax regulations, and are exempt from value-added tax.
3.2 Cryptocurrency Tax System
In Germany, the purchase and sale of cryptocurrencies and trading profits are regarded as capital gains. According to the German Income Tax Act, if an individual holds cryptocurrency for more than one year, the capital gains obtained when it is sold are tax-free. If the holding period is less than one year, the gains from the sale are subject to capital gains tax. If an individual's profit from cryptocurrency trading does not exceed 600 euros in a fiscal year, this part of the gain is tax-free under German tax law. This provides certain tax benefits for small personal transactions and investments.
In terms of mining and staking, cryptocurrency income obtained through mining is generally regarded as part of the income from business activities and is taxable as income, but the expenses incurred in the mining process can be deducted. For gains from cryptocurrency staking, if the holding period is more than one year, these gains are tax-free; if less than one year, they are subject to income tax.
In terms of airdrop and fork income, if the airdropped tokens are related to business activities, the tokens received are regarded as business income. The tokens are valued at the market price at the time of receipt; if the airdrop involves the provision of services (such as the promotion of the project on social media), the income from such services belongs to other income under Section 22, No. 3 of the Income Tax Act and needs to be declared at the market price. A fork is a hard fork or soft fork of a blockchain. A hard fork generates new virtual currency, which is taxed as follows: the newly generated tokens are treated as independent assets, and the acquisition costs of the allocated original tokens are allocated in proportion to the market prices 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 proceeds are subject to private sales transaction tax. In addition, according to the "Individual Issues on the Income Tax Treatment of Virtual Currencies and Other Tokens" (Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von sonstigen Token) issued by the German Federal Ministry of Finance, the exchange between cryptocurrencies and traditional currencies is exempt from VAT. This means that the purchase and sale of cryptocurrencies themselves will not generate VAT, further reducing the tax burden of crypto transactions. In addition, if cryptocurrencies are used as a means of payment for the purchase of goods or services, their increased value may be subject to income tax.
4. Construction and Improvement of Germany's Crypto Regulatory Framework
The German Federal Financial Supervisory Authority (BaFin) officially defines cryptocurrencies as Crypto Values, regards them as a new type of financial instrument, and introduces "cryptocurrency custody business" as a new type of financial service. According to BaFin's requirements, from January 1, 2020, any company that wishes to provide cryptocurrency custody services, including Bitcoin exchanges or Bitcoin custodians, must obtain a license from BaFin.
Germany implemented the fifth EU Anti-Money Laundering Directive (AMLD5) in 2020, requiring cryptocurrency exchanges and wallet providers to comply with strict 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 Bundestag passed the Electronic Securities Act (Gesetz zur Einführung von elektronischen Wertpapieren, eWpG). The eWpG defines crypto-securities and treats them as a subcategory of electronic securities. The implementation of the German Electronic Securities Act marks an important step for Germany in the field of digital finance, helping to ensure technological neutrality, improve the efficiency of financial markets and reduce operating costs. The introduction of this law also responds to the German government's position to promote blockchain strategy and the principle of technological neutrality.
In November 2021, the new German government mentioned cryptocurrencies in its coalition agreement and advocated the establishment of an equal competitive environment between traditional finance and innovative business models. The coalition called for a new dynamic to ensure comprehensive and risk-appropriate regulation of new business models.
In 2022, the German Federal Ministry of Finance issued the first national cryptocurrency tax guide "Individual Issues on the Income Tax Treatment of Virtual Currency and Other Tokens", which involves tax scenarios such as mining, staking, lending, hard forks and airdrops. The specific provisions have been mentioned above. The guide further improves the German crypto regulatory framework and shows the German government's positive attitude towards cryptocurrency regulation.
5. Summary and Outlook
In terms of the tax system, Germany has shown an inclusive and friendly attitude towards cryptocurrencies, aiming to balance innovation incentives and risk management. This is mainly reflected in the tax exemption of small gains, tax incentives for personal investments, and VAT exemptions. In the future, Germany may continue to optimize its cryptocurrency tax policy to adapt to market development and the needs of international cooperation.
In terms of the regulatory system, Germany's cryptocurrency regulatory environment is considered to be one of the friendliest 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 needs to remain adaptable in the future to cope with emerging challenges and opportunities. Germany may strengthen its cooperation with other countries and international organizations on cryptocurrency regulation to promote the unification of global regulatory standards. In short, the development of Germany's cryptocurrency tax and regulatory system is providing increasingly clear guidance and incentives for the country's cryptocurrency industry. We believe that Germany can create an ecosystem conducive to the healthy development of cryptocurrencies, which in turn will feed back to the prosperity of the German economy. References [1]. Bundesministerium der Finanzen. (2022, September). Internationaler Informationsaustausch zu Transaktionen über Krypto-Vermögenswerte. Analysen und Berichte Monatsbericht des BMF. [2]. Andreas Fillmann. (2021, June). German Law on the Introduction of Electronic Securities. Retrieved from Souire Ratton Boggs.[3].Deng Yuanjun. Overview of German Tax System and Its Reference[J]. Journal of School of Taxation, Yangzhou University, 2002(04):29-35.[4]. Research Group of International Taxation Country (Region) Investment Tax Guide of State Administration of Taxation.(2021) Tax Guide for Chinese Residents Investing in Germany.[5]. Ministry of Commerce of the People's Republic of China.(2020) How Much Do You Know about German Tax System?
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