Germany is the first country in the world to officially recognize the legality of cryptocurrency transactions such as Bitcoin, and the number of Bitcoin and Ethereum nodes is second only to the United States.
Author: TaxDAO
1. Introduction
Germany's attitude towards cryptocurrency 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 cryptocurrency transactions such as Bitcoin, and the number of Bitcoin and Ethereum nodes is second only to the United States. In addition, the German government encourages the active participation of the banking industry and financial institutions in the development of cryptocurrencies, has established a relatively friendly tax system, and provides corresponding supervision and guidance.
2. Overview of Germany's Basic Tax System
2.1 German Tax System
The main source of federal German fiscal revenue comes from tax revenue, other regular income, and capital project income, with tax revenue always being the main source of fiscal revenue, accounting for about 50% of the total. After the tax reform, Germany's tax revenue has been steadily increasing, and its proportion in fiscal revenue has been steadily rising.
Germany's tax system is known for its complexity, multi-level structure, and high efficiency. Germany is a federal state, and its administrative management system is divided into three levels: federal, state, and local. Each level of administrative management has its own functions and division of labor, and the expenses incurred in performing these functions are borne by them. Therefore, Germany implements a three-tier tax system of federal, state, and local taxes, dividing all taxes into shared taxes and exclusive taxes. Shared taxes are shared by the federal, state, and local governments or two of them, and are distributed among the levels of government according to certain rules and proportions; exclusive taxes are levied and managed solely by a certain level of government and are not shared with other governments. Typical representatives of shared taxes include value-added tax (Umsatzsteuer) and income tax (Einkommensteuer), the revenue of which is jointly levied by the federal government and state governments and shared between them. The revenue from value-added tax is distributed to each state in a certain proportion, while the revenue from income tax is allocated based on population and economic conditions.
Exclusive taxes are the exclusive revenue of a certain level of government, only levied and managed by that level of government, and not shared with other governments. The tax types of exclusive taxes include but are not limited to property tax for local governments and land transaction tax for state governments. For example, the land tax is a tax levied by local governments on existing land and its surface buildings, and the tax rate is determined by the local government, reflecting the characteristics of tailored policies for different cities.
2.2 Main Types of Taxes
2.2.1 Corporate Income Tax
Taxpayers of corporate income tax are divided into unlimited tax liability and limited tax liability. Unlimited tax liability refers to enterprises located within Germany that have a tax liability for income from all over the world; limited tax liability refers to enterprises located outside Germany that only have a tax liability for income derived from within Germany. If there is a double taxation avoidance agreement between the two countries, foreign enterprises can usually enjoy tax relief. The corporate income tax rate in Germany is 15%.
2.2.2 Personal Income Tax
German residents bear unlimited tax liability, meaning that all their income, both domestic and foreign, is subject to taxation; non-German residents bear limited tax liability, usually only taxed on their income within Germany. The scope of personal income tax includes income from agriculture and forestry, income from industrial and commercial activities, income from freelance work, income from employment, investment income, rental income, and other income. It is levied in the form of classified income and comprehensive calculation, with progressive tax rates ranging from 14% to 45% and a basic exemption amount.
2.2.3 Value-Added Tax
Germany's value-added tax is a turnover tax borne by consumers. The current standard value-added tax rate is uniformly 19% nationwide, with a reduced tax rate of 7% applicable to food, books, and other goods. Businesses can deduct the input tax from the value-added tax invoices obtained during their operations when declaring value-added tax.
Value-added tax can be declared on a monthly or quarterly basis. Newly established enterprises or those with monthly value-added tax payments of less than 7500 euros in the previous year can choose to declare on a quarterly basis, with a deadline of the 10th of the month following the end of the quarter; if the monthly value-added tax payments in the previous year exceed 7500 euros, they still need to declare on a monthly basis, with a deadline of the 10th of the following month. In addition, businesses also need to settle the annual value-added tax at the end of the year.
3. Germany's Cryptocurrency Tax Policy
3.1 Qualification of Cryptocurrencies
Since the birth of Bitcoin in 2009, the scale of cryptocurrency transactions has expanded rapidly. In this context, on February 27, 2018, the German Federal Ministry of Finance issued a letter based on the judgment of the European Court of Justice in the "Hedqvist case," using the concept of "virtual currency" (Virtuelle Währungen). The German Federal Ministry of Finance believes that the rules applicable to the exchange between Bitcoin and traditional currency can also be applied to the exchange between other virtual currencies and traditional currency.
The German government has a broad definition of crypto assets. According to a document released by the German Federal Financial Supervisory Authority (BaFin) in 2020, it has created a broader definition for cryptocurrency assets, considering cryptocurrencies as a financial instrument. Although they do not meet the definition of traditional financial instruments, they have the legal status of currency or money, can serve as a medium of exchange, and can be transferred, stored, and traded electronically. The German Federal Ministry of Finance (BMF) pointed out in 2022 that a single unit of cryptocurrency is an asset. They reflect the ability to transfer the economic benefits of the public key assigned to the owner to another public key. They can be valued based on market prices, which are usually determined by exchanges, trading platforms, or listed companies. The beneficial owner refers to the person who can initiate a transaction to "control" the virtual currency or other token tokens allocated to which public key. Usually, this is the owner of the private key. However, ownership is not affected if the transaction is initiated by a platform storing the private key or allocated according to the instructions of the beneficial owner.
In terms of tax policy, Germany defines cryptocurrencies as special products with dual attributes of currency and property. Major cryptocurrencies (such as Bitcoin) are considered legal private currencies, not legal tender, and holding, buying, and using cryptocurrencies is a legal activity. As cryptocurrencies are considered assets, their trading and profits are usually taxed according to the provisions of personal income tax and capital gains tax, and are exempt from value-added tax.
3.2 Cryptocurrency Tax System
In Germany, the buying and selling of cryptocurrencies and trading profits are considered capital gains. According to the provisions of German income tax law, the capital gains obtained from the sale of cryptocurrencies held by individuals 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 in a fiscal year do not exceed 600 euros, according to German tax law, this portion of the income can be tax-exempt. This provides a certain tax advantage for small-scale personal trading and investment.
Regarding mining and staking, income from cryptocurrencies obtained through mining is usually considered part of business activity income and should be taxed as income, but the expenses incurred during mining can be deducted. For income obtained from cryptocurrency staking, if the holding period exceeds one year, these profits are tax-exempt; if the holding period is less than one year, income tax is required.
In terms of airdrops and fork income, if the airdropped tokens are related to business activities, the received tokens are considered business income. The tokens are valued at the market price at the time of receipt; if the airdrop involves providing services (such as promoting projects on social media), the income from such services falls under the other income specified in Article 22, Paragraph 3 of the Income Tax Act and should be declared at market prices. A fork refers to a hard fork or soft fork of a blockchain. A hard fork will produce new virtual currencies, and the tax treatment is as follows: the newly generated tokens are considered independent assets, and the acquisition cost of the original tokens should be 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 within the holding period, the profits are subject to private sales transaction tax.
In addition, according to the "Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von sonstigen Token" (Individual Issues on the Income Tax Treatment of Virtual Currencies and Other Tokens) released by the German Federal Ministry of Finance, the exchange between cryptocurrencies and traditional currencies is exempt from value-added tax. This means that the purchase and sale of cryptocurrencies themselves do not incur value-added tax, further reducing the tax burden on cryptocurrency transactions. Additionally, if cryptocurrencies are used as a means of payment for purchasing goods or services, the appreciated portion may be subject to income tax.
4. Construction and Improvement of Germany's Cryptocurrency Regulatory Framework
The German Federal Financial Supervisory Authority (BaFin) officially defines cryptocurrencies as Crypto Values, considering them as a new type of financial instrument, and has introduced "cryptocurrency custody business" as a new financial service. According to BaFin's requirements, as of January 1, 2020, any company wishing to provide cryptocurrency custody services, including Bitcoin exchanges or Bitcoin custody institutions, 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 of suspicious transactions, and implementation of internal control measures to ensure market transparency and compliance.
In May 2021, the German Federal Parliament passed the "Gesetz zur Einführung von elektronischen Wertpapieren" (eWpG), which defines and categorizes crypto securities as a subclass of electronic securities. The implementation of the German Electronic Securities Act marks an important step for Germany in the digital finance field, helping to ensure technological neutrality, improve financial market efficiency, and reduce operating costs. The enactment of this law also reflects the German government's position in promoting blockchain strategy and technological neutrality.
In November 2021, the new German government mentioned cryptocurrencies in its coalition agreement and advocated for establishing 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 released the first national cryptocurrency tax guide, "Einzelfragen zur ertragsteuerrechtlichen Behandlung von virtuellen Währungen und von sonstigen Token," which covers mining, staking, lending, hard forks, airdrops, and other tax scenarios, as previously mentioned. This guide further improves Germany's cryptocurrency regulatory framework, demonstrating the German government's positive attitude towards cryptocurrency regulation.
5. Summary and Outlook
In terms of the tax system, Germany has shown a tolerant and friendly attitude towards cryptocurrencies, aiming to balance innovation incentives with risk management. This is mainly reflected in tax exemptions for small profits, tax incentives for personal investments, and exemptions from value-added tax. In the future, Germany may continue to optimize its cryptocurrency tax policies to adapt to market development and international cooperation needs.
In terms of regulatory systems, Germany's cryptocurrency regulatory environment is considered one of the most friendly 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 adaptable to address emerging challenges and opportunities. Germany may strengthen its cooperation with other countries and international organizations in cryptocurrency regulation to promote the harmonization of global regulatory standards.
In summary, 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, thereby contributing 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. (2002). Overview and Reference of German Tax System. Journal of Taxation, Yangzhou University, 29-35.
[4]. State Administration of Taxation, Ministry of Commerce of the People's Republic of China. (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 the German tax system?
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