Overview of Germany's Crypto Assets Taxation and Regulatory System

1. Introduction

Germany has an open attitude towards Crypto Assets. In 2013, the German Ministry of Finance began to pay attention to the development of Crypto Assets and issued relevant policies. Germany is the first country in the world to officially recognize the legality of transactions involving Bitcoin and other Crypto Assets, with its number of Bitcoin and Ethereum nodes only second to the United States. In addition, the German government encourages banks and financial institutions to actively participate in the development of Crypto Assets, has established a friendly tax system, and regulates and guides them.

2. Overview of the Basic Tax System in Germany

2.1 German Tax System

Germany's tax revenue is a major source of fiscal income, accounting for about 50%. After the tax reform, tax revenue grew slowly, steadily increasing its proportion of fiscal income.

Germany implements a three-tier taxation system of federal, state, and local taxes, dividing taxes into shared taxes and exclusive taxes. Shared taxes are owned and distributed by multiple levels of government, while exclusive taxes belong solely to each level of government.

Shared taxes include value-added tax and income tax, which are jointly collected and shared by federal and state governments. Value-added tax revenue is distributed among the states in proportion, while income tax revenue is allocated based on population and economic conditions.

Exclusive taxes are proprietary revenues of a certain level of government, such as property taxes of local governments and land transaction taxes of state governments.

2.2 Main Types of Taxes

2.2.1 Corporate Income Tax

The entities liable for corporate income tax are divided into unlimited liability taxpayers and limited liability taxpayers. Unlimited liability taxpayers pay tax on global income; limited liability taxpayers only pay tax on income within Germany. If there is a double taxation avoidance agreement, foreign enterprises can enjoy tax reductions. The corporate income tax rate in Germany is 15%.

2.2.2 Personal Income Tax

Residents of Germany are taxed on all income, both domestic and foreign; non-resident taxpayers typically only pay taxes on income earned within Germany. Personal income tax covers various types of income and is assessed in a classified and comprehensive manner, with rates ranging from 14% to 45%, on a progressive scale, and there is a basic exemption amount.

2.2.3 Value Added Tax

Value-added tax is a turnover tax, borne by consumers as the final tax burden. The standard tax rate is 19%, with a reduced tax rate of 7% applicable to certain goods. Enterprises can deduct input tax. Value-added tax declarations are made monthly and quarterly; new enterprises or small-scale taxpayers may choose quarterly declarations, while large-scale taxpayers must declare monthly. Enterprises are also required to conduct an annual reconciliation and settlement.

3. Germany's Crypto Assets Tax Policy

3.1 Qualitative Analysis of Crypto Assets

The German government has a broad definition of Crypto Assets. In 2020, the Federal Financial Supervisory Authority of Germany defined cryptocurrency as a financial instrument, possessing legal status as money or currency. In 2022, the Federal Ministry of Finance of Germany indicated that units of cryptocurrency are assets that reflect the ability to distribute economic benefits and can be valued based on market prices.

In terms of tax policy, Germany defines Crypto Assets as a special product with dual attributes of currency and property, with major Crypto Assets regarded as legal private currency, not legal tender. Holding, buying, selling, and using Crypto Assets is legal, and their transactions and profits are generally taxed according to personal income tax and capital gains tax regulations, exempt from value-added tax.

3.2 Crypto Assets Taxation System

Germany considers the buying and selling of Crypto Assets and trading profits as capital gains. Individuals holding Crypto Assets for more than one year are exempt from capital gains tax on profits made upon sale. For holdings of less than one year, capital gains tax must be paid on the profits from the sale. Individuals can be exempt from tax if their profits from Crypto Assets trading do not exceed 600 euros in a fiscal year.

Income from mining is usually considered business activity income and is subject to taxation, with relevant expenses deductible. Staking income held for more than one year is tax-exempt, while income held for less than one year is subject to income tax.

When airdropped tokens are related to commercial activities, they are regarded as business income; if they involve the provision of services, they fall under other income and must be reported at market price. New tokens generated from a hard fork are considered independent assets; the fork itself does not constitute a taxable event, but the sale of new tokens during the holding period is subject to private sales transaction tax.

Crypto Assets are exempt from value-added tax when exchanged with traditional currency. When Crypto Assets are used as a means of payment, the appreciated portion may be subject to income tax.

4. The Construction and Improvement of Germany's Cryptocurrency Regulatory Framework

The Federal Financial Supervisory Authority of Germany defines Crypto Assets as encrypted values and considers them as a new type of financial instrument, introducing the concept of "Crypto Asset Custody Business." Since 2020, companies providing Crypto Asset custody services are required to obtain regulatory licenses.

In 2020, Germany implemented the fifth EU Anti-Money Laundering Directive, requiring Crypto Assets exchanges and wallet providers to comply with strict AML/CTF regulations.

In May 2021, Germany passed the "Electronic Securities Act," defining Crypto Assets and promoting financial digitalization. In November of the same year, the new government coalition agreement proposed establishing a level playing field between traditional finance and innovative business models.

In 2022, the Federal Ministry of Finance of Germany released a nationwide tax guide for Crypto Assets, covering various tax scenarios and further improving the encryption regulatory framework.

5. Summary and Outlook

Germany has shown an inclusive and friendly approach to the taxation system for Crypto Assets, balancing innovation incentives with risk management. In the future, it may continue to optimize policies to adapt to market development and international cooperation needs.

In terms of regulation, Germany is considered one of the most friendly countries in Europe, providing a safe and transparent environment for investors. The future regulatory framework needs to remain adaptive to address new challenges and opportunities. Germany may strengthen international cooperation to promote the unification of global regulatory standards.

In summary, Germany's Crypto Assets tax and regulatory framework is providing clear guidance and incentives for the industry, aiming to create an ecosystem conducive to the healthy development of Crypto Assets and promote economic prosperity.