- Introduction
Germany’s attitude towards cryptocurrencies has been relatively open and friendly. As early as 2013, the German Ministry of Finance began paying attention to the development of cryptocurrencies and issued relevant policy documents. Germany was the first country in the world to officially recognize the legality of cryptocurrency transactions, such as Bitcoin, and the number of Bitcoin and Ether nodes in Germany is second only to that in the United States. Additionally, the German government encourages the banking industry and financial institutions to actively participate in the development of cryptocurrencies by establishing a more favorable tax system and providing regulation and guidance…
- Overview of Germany’s Basic Tax System
2.1 German Tax System
The fiscal revenue of the Federal Republic of Germany primarily comes from tax revenue, other current revenue, and capital project revenue, with taxes consistently serving as the main source of fiscal revenue, accounting for approximately 50%. Following the tax reform, Germany’s tax revenues have grown slowly, while the proportion of tax revenue in overall fiscal revenues has steadily increased.
The German tax system is recognized for its complexity, multi-layered structure, and high efficiency. As a federal country, Germany has a three-tier administrative system at the federal, state, and local levels, each with distinct functions and responsibilities. The costs incurred in performing these functions are also borne by the respective level of government. Consequently, Germany employs a federal, state, and local taxation system, categorizing all taxes into two types: shared taxes and exclusive taxes. Shared taxes are levied by and allocated among the federal, state, and local governments—or between any two of them—according to specified rules and proportions, while exclusive taxes are allocated solely to the federal, state, or local government as their exclusive revenue.
Typical examples of shared taxes include the value-added tax (Umsatzsteuer) and the income tax (Einkommensteuer), the revenues from which are jointly collected by the federal and state governments and then shared between them. Revenues from value-added taxes are distributed among the Länder according to specific proportions, while income tax revenues are allocated based on population and economic status.
Exclusive taxes are those that belong solely to a particular level of government, collected and administered only by that level, and are not shared with other governments. Exclusive taxes include, but are not limited to, real estate taxes collected by local governments, land transaction taxes collected by state governments, and others. For example, the land tax is a tax imposed by local governments on land and its surface buildings, with the tax rate determined by the local governments themselves, reflecting city-specific policies.
Typical examples of shared taxes include the value-added tax (Umsatzsteuer) and the income tax (Einkommensteuer), the revenues from which are jointly collected by the federal and state governments and then shared between them. Revenues from value-added taxes are distributed among the Länder according to specific proportions, while income tax revenues are allocated based on population and economic status.
Exclusive taxes are those that belong solely to a particular level of government, collected and administered only by that level, and are not shared with other governments. Exclusive taxes include, but are not limited to, real estate taxes collected by local governments, land transaction taxes collected by state governments, and others. For example, the land tax is a tax imposed by local governments on land and its surface buildings, with the tax rate determined by the local governments themselves, reflecting city-specific policies.
2.2 Major Types of Taxes
2.2.1 Corporate Income Tax
Corporate income taxpayers are categorized as either unlimited taxpayers or limited taxpayers. Unlimited taxpayers, meaning companies based in Germany, are liable for tax on their worldwide income, whereas limited taxpayers, meaning companies based outside of Germany, are only liable for tax on income sourced from Germany. Foreign companies can often benefit from tax relief if a double taxation agreement exists between their home country and Germany. The corporate income tax rate in Germany is 15%.
2.2.2 Individual Income Tax
Permanent residents of Germany are subject to unlimited tax liability, meaning they are taxed on all of their domestic and foreign income. In contrast, non-permanent residents are subject to limited tax liability and are typically taxed only on their income sourced from Germany. Personal income tax is imposed on income derived from agriculture and forestry, business and industry, liberal professions, employment, investments, rental income, and other sources. A categorized and comprehensive taxation system is applied, with progressive income tax rates ranging from 14% to 45%, along with basic deductions.
2.2.3 VAT
VAT in Germany is a turnover tax, with the ultimate tax burden falling on the consumer. The current VAT rate is a uniform national rate of 19%, while a reduced rate of 7% applies to goods such as food and books. VAT invoices obtained by companies in the course of their business are deductible as input tax in their VAT declaration.
The VAT declaration process is divided into monthly and quarterly filings. Newly established enterprises or those that paid less than EUR 7,500 in VAT per month in the previous year may opt for quarterly declarations, with the filing deadline being the 10th of the month following the end of the quarter. If the monthly VAT payment in the previous year exceeded EUR 7,500, monthly declarations must still be filed, with the deadline being the 10th of the following month. Additionally, enterprises are required to make an annual VAT remittance at the end of the year.
- German Crypto Tax Policy
3.1 Characterization of Cryptocurrencies
Since the creation of Bitcoin in 2009, cryptocurrency transactions have expanded dramatically. Against this backdrop, on February 27, 2018, the German Federal Ministry of Finance issued an official letter based on the European Court of Justice’s judgment in the “Hedqvist case,” where the term “virtual currency” (Virtuelle Währungen) was used. The Ministry stated that the rules applicable to the exchange of Bitcoin with traditional currencies could also apply to the exchange of other virtual currencies with traditional currencies.
The German government’s definition of crypto assets is broader. According to a document issued by the German Federal Financial Supervisory Authority (BaFin) in 2020, cryptocurrency assets were defined more expansively. Cryptocurrencies act as a financial instrument and, while they do not meet the criteria of traditional financial instruments, they possess the legal status of currency or money. They can serve as a medium of exchange and be transmitted, stored, and traded electronically. In 2022, the German Federal Ministry of Finance (BMF) declared that individual units of cryptocurrencies are considered assets. These units embody the ability to transfer the economic benefits linked to a public key assigned to its owner to another public key. They can be valued based on a market price, typically determined through an exchange, trading platform, or publicly traded company. The beneficial owner is defined as the individual who can initiate a transaction and thus “control” the public key associated with a virtual currency or other token, usually being the owner of the private key. However, if the transaction is initiated through a platform where the private key is stored or is distributed at the direction of the beneficial owner, this attribution remains unaffected.
In terms of tax policy, Germany defines cryptocurrencies as special assets with the dual attributes of money and property. Major cryptocurrencies (e.g., Bitcoin) are treated as legal private currencies rather than statutory currencies, and the holding, trading, and use of cryptocurrencies are considered lawful activities. At the same time, since cryptocurrencies are inherently assets, their sale, purchase, and any resulting profits are generally subject to personal income tax and capital gains tax but are exempt from VAT.
3.2 Cryptocurrency Tax System
In Germany, profits from the purchase, sale, and trading of cryptocurrencies are considered capital gains. According to the German Income Tax Act, capital gains from the sale of cryptocurrencies held by an individual for more than one year are tax-free. However, if held for less than one year, the gains from the sale are subject to capital gains tax. Additionally, if an individual earns no more than €600 in profit from cryptocurrency trading within a financial year, this gain is exempt from tax under German tax law. This provides certain tax advantages for small-scale individual transactions and investments.
Regarding mining and staking, income derived from cryptocurrency mining is generally considered part of business income and is taxable, with deductions allowed for expenses incurred during the mining process. In the case of income derived from staking cryptocurrencies, the proceeds are tax-free if the assets are held for more than one year; however, they are subject to income tax if held for less than one year.
With respect to airdrop and fork income, tokens received are considered business income if the airdrop is related to a business activity. These tokens are valued at their market price at the time of receipt. If the airdrop involves the provision of services (e.g., promoting a project on social media), the income from such services is classified as other income under Section 22(3) of the Income Tax Act and must be reported at market value.
A fork can be either a hard or soft fork of a blockchain. A hard fork results in the creation of a new virtual currency, and the tax treatment is as follows: the newly created tokens are regarded as separate assets, and the acquisition cost of the original tokens is allocated proportionally based on the market price of both tokens at the time of the fork. The fork itself does not constitute a taxable event; however, if the newly created tokens are sold during the holding period, the proceeds are subject to capital gains tax on private sales transactions.
Additionally, according to the “Individual Questions 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, swaps between cryptocurrencies and traditional currencies are exempt from VAT. This means that the purchase and sale of cryptocurrencies do not incur VAT, further reducing the tax burden on crypto transactions. However, when cryptocurrencies are used as a means of payment for goods or services, the value added may be subject to income tax.
- Construction and Improvement of the German Crypto Regulatory Framework
The German Federal Financial Supervisory Authority (BaFin) officially defines cryptocurrencies as “Crypto Values,” recognizing them as a new type of financial instrument, and has introduced “cryptocurrency custodian business” as a new type of financial service. According to BaFin, from January 1, 2020, any company wishing to provide cryptocurrency custodian services, including Bitcoin exchanges or Bitcoin custodians, must obtain a license from BaFin.
In 2020, Germany implemented the Fifth EU Anti-Money Laundering Directive (AMLD5), 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 controls to ensure transparency and compliance within the market.
In May 2021, the German Federal Parliament passed the Electronic Securities Act (Gesetz zur Einführung von elektronischen Wertpapieren, eWpG). The eWpG defines crypto securities and includes them as a subcategory of electronic securities. The implementation of this law represents a significant step in the field of digital finance, helping to safeguard technological neutrality, increase financial market efficiency, and reduce operational costs. The introduction of this law also aligns with the German government’s commitment to promoting blockchain strategies and the principle of technological neutrality.
The new German government mentioned cryptocurrencies in its coalition agreement in November 2021, advocating for a level playing field between traditional finance and innovative business models. The coalition emphasized the need for a dynamic approach 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 Concerning the Income Tax Treatment of Virtual Currencies and Other Tokens,” covering tax scenarios such as mining, staking, lending, hard forks, and airdrops, as previously mentioned. This guide further enhances Germany’s crypto-regulatory framework and demonstrates the government’s proactive approach to cryptocurrency regulation.
- Summary and Outlook
In terms of its tax system, Germany has demonstrated an inclusive and favorable attitude toward cryptocurrencies, aiming to balance innovation incentives with risk management. This is primarily reflected in the tax exemption for small gains, tax benefits for personal investments, and VAT exemption. In the future, Germany may continue to refine its cryptocurrency tax policy to accommodate market developments and the need for international cooperation.
Regarding the regulatory framework, Germany’s cryptocurrency regulatory environment is considered one of the most investor-friendly in Europe, offering a secure and transparent investment landscape. As the cryptocurrency market and related technologies continue to evolve rapidly, Germany’s regulatory framework will need to remain adaptable to address emerging challenges and opportunities. It is likely that Germany will strengthen cooperation with other countries and international organizations to promote the harmonization of global cryptocurrency regulatory standards.
In conclusion, the development of Germany’s cryptocurrency tax and regulatory framework is providing increasingly clear guidance and incentives for the country’s cryptocurrency industry. It is anticipated that Germany will create an ecosystem conducive to the healthy development of cryptocurrencies, which will contribute to the prosperity of the German economy.
