Original title: "Open and Friendly: German Crypto Asset Taxation and Regulatory System"

Original source: 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 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 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 reform, Germany's tax revenue has been growing slowly, and its proportion of fiscal revenue has been steadily increasing.

Germany's tax system is famous for its complexity, multi-level structure and high efficiency. Germany is a federal country, and its administrative system is 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 assigned 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 levied by the federal government and state governments and shared between them. The income from value-added tax is distributed to the states in a certain proportion, while the income from income tax is distributed according to population and economic conditions.

Exclusive tax is the exclusive income of a certain level of government, which is only collected and managed by the government at that level and is not shared with other governments. Exclusive tax types include but are not limited to local government real estate tax, state government land transaction tax, etc. For example, land tax is a tax levied by local governments on existing land and its ground buildings. The tax rate is determined by the local government, 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 tax payers and limited tax payers. Unlimited tax payers, i.e. companies located in Germany, are liable for tax on income from all over the world; limited tax payers, i.e. companies located outside Germany, are liable for tax 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 permanent residents are subject to unlimited tax liability, i.e. all their domestic and foreign income is taxed; non-German permanent residents are subject to limited tax liability, and usually only pay tax on their income in Germany. The scope of personal income tax 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 and ranges from 14% to 45%, with basic exemptions.

2.2.3 Value Added Tax

Germany's value added tax is a turnover tax, and consumers bear the final tax burden. The current value added tax rate is 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 used as input tax deduction when declaring value added tax.

Value added tax declarations are divided into monthly declarations and quarterly declarations. Newly established enterprises or those whose monthly value added tax payment in the previous year is less than 7,500 euros can choose to declare quarterly, and the deadline for declaration is the 10th of the month following the end of the quarter; if the monthly value added tax payment in the previous year exceeds 7,500 euros, monthly declarations are still required, and the deadline for declaration is the 10th of the next month. In addition, enterprises are required to settle the annual VAT at the end of the year.

3. German Cryptocurrency Tax Policy

3.1 Characterization of Cryptocurrency

Since the birth of Bitcoin in 2009, the scale of transactions involving cryptocurrencies has expanded dramatically. Against this background, on February 27, 2018, the German Federal Ministry of Finance issued a public letter based on the judgment of the European Court of Justice 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's definition of crypto assets is relatively broad. According to a document published by the German Federal Financial Supervisory Authority (BaFin) in 2020, it created a broader definition for crypto 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 economic benefits from a 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 is the person who can initiate transactions and thus "control" which public key the virtual currency or other token is assigned to. Usually, this is the owner of the private key. However, if the transaction is initiated through the platform where the private key is stored or allocated according to the instructions of the beneficial owner, the attribution is not affected. [1]

In terms of tax policy, Germany defines cryptocurrency as a special product with dual attributes of currency and property. Major cryptocurrencies (such as Bitcoin) are regarded as legal private currencies, not legal tender. Holding, buying, selling and using cryptocurrencies are legal. At the same time, since cryptocurrencies are assets, their buying and selling 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 and trading profits of cryptocurrencies are regarded as capital gains. According to the provisions of the German Income Tax Law, 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 the profit obtained by an individual from cryptocurrency trading in a fiscal year does not exceed 600 euros, this part of the income is tax-free according to German tax law. This provides certain tax benefits for small personal transactions and investments.

In terms of mining and staking, cryptocurrency income from mining is generally considered part of the income from business activities and is taxable as income, but 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 considered 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 is included in other income specified in Article 22, Item 3 of the Income Tax Act and must be reported at the market price. A fork is a hard fork or soft fork of a blockchain. A hard fork generates new virtual currencies, which are taxed as follows: the newly generated tokens are considered independent assets, and the acquisition cost of the distributed original tokens is 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 gains are subject to private sales transaction tax.

In addition, according to the "Individual Issues on the Income Tax Treatment of Virtual Currency 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 added value may be subject to income tax.

4. Construction and improvement of the German 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 policies to adapt to market development and the needs of international cooperation.

In terms of regulatory regime, Germany's cryptocurrency regulatory environment is considered 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 will need to remain adaptable in the future to meet emerging challenges and opportunities. Germany may strengthen cooperation with other countries and international organizations in cryptocurrency regulation to promote the unification of global regulatory standards.

In short, the development of Germany's cryptocurrency taxation and regulatory regime is providing clearer guidance and incentives for the country's cryptocurrency industry. We believe that Germany can create an ecosystem conducive to the healthy development of cryptocurrency, which in turn feeds back to the prosperity of the German economy.

References

[1].Bundesministerium der Finanzen.(2022, September). Internationaler Informationsaustausch zu Transferen 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 Yangzhou University School of Taxation,2002(04):29-35.  

[4]. Research Group of International Tax 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 the German Tax System?