Overview of Germany's Crypto Assets Taxation and Regulation System

1. Introduction

Germany has a relatively open and friendly attitude towards Crypto Assets. As early as 2013, the German Ministry of Finance began to pay attention to the development of Crypto Assets and issued relevant policy documents. Germany is the first country in the world to officially recognize the legality of trading in Bitcoin and other Crypto Assets, and its number of Bitcoin and Ethereum nodes is second only 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 relatively friendly taxation system, and provides corresponding regulation and guidance.

2. Overview of Germany's Basic Tax System

2.1 German Tax System

Germany's tax system is known for its complexity, multi-tier structure, and high efficiency. As a federal state, Germany implements a three-tier taxation system at the federal, state, and local levels, dividing all taxes into two main categories: shared taxes and exclusive taxes. Shared taxes are jointly owned by the federal, state, and local governments, or by two of the three levels of government, and are distributed according to certain rules and proportions; exclusive taxes are allocated to the federal, state, or local governments as their exclusive income.

Typical representatives of shared taxes include value-added tax and income tax, the revenues of which are collected jointly by the federal and state governments and shared between them. Exclusive taxes are proprietary revenues of a certain level of government, collected and managed solely by that level of government, without sharing with other governments.

2.2 Main Types of Taxes

2.2.1 Corporate Income Tax

The subjects of corporate income tax are divided into unlimited liability taxpayers and limited liability taxpayers. Unlimited liability taxpayers are liable for tax on income sourced globally; limited liability taxpayers are only liable for tax on income sourced within Germany. The corporate income tax rate in Germany is 15%.

2.2.2 Personal Income Tax

Permanent residents in Germany are subject to unlimited tax liability, meaning they must pay taxes on all their income both domestic and foreign; non-permanent residents in Germany have limited tax liability, usually paying taxes only on their income earned within Germany. Individual income tax is levied in a classified and comprehensive manner, with rates ranging from 14% to 45%, and there is a basic exemption amount.

2.2.3 Value Added Tax

Germany's value-added tax (VAT) is a turnover tax borne by the consumer. The current VAT rate is a unified national rate of 19%, with a preferential tax rate of 7% applicable to goods such as food and books. VAT invoices obtained by businesses during their operations can be deducted as input tax during VAT declaration.

3. Germany's Crypto Assets Tax Policy

3.1 Qualitative Analysis of Crypto Assets

The German government has a relatively broad definition of crypto assets. According to a document released by the Federal Financial Supervisory Authority (BaFin) in 2020, cryptocurrencies, although they do not meet the definition of traditional financial instruments, possess legal status as money or currency, can serve as a medium of exchange, and can be transmitted, stored, and traded electronically.

In terms of tax policy, Germany defines Crypto Assets as a special product with dual attributes of currency and property. Major Crypto Assets are regarded as legal private currency, and the holding, buying, selling, and use of Crypto Assets are legal activities.

3.2 Crypto Assets Taxation System

In Germany, the buying and selling of Crypto Assets and trading profits are considered capital gains. If an individual holds Crypto Assets for more than one year, the capital gains obtained from its sale are tax-free. If the holding period is less than one year, the profits from the sale are subject to capital gains tax. If the profits obtained from Crypto Asset trading by an individual in a fiscal year do not exceed 600 euros, this portion of the income can be tax-exempt.

Income from Crypto Assets obtained through mining is typically considered part of business activity income and should be taxed as income, but expenses incurred during the mining process can be deducted. For earnings obtained from staking Crypto Assets, if held for more than one year, those earnings are tax-exempt; if held for less than one year, income tax must be paid.

In terms of airdrop and fork income, if the airdropped tokens are related to business activities, the received tokens are considered business income. The fork itself does not constitute a taxable event, but if the new tokens are sold during the holding period, the profits are subject to private sales transaction tax.

In addition, the exchange between Crypto Assets and traditional currency is exempt from value-added tax. This means that buying and selling Crypto Assets itself does not incur value-added tax, further alleviating the tax burden of Crypto transactions.

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

The Federal Financial Supervisory Authority of Germany (BaFin) has officially defined Crypto Assets as encrypted value, considering them as a new type of financial instrument, and has introduced "cryptocurrency custody services" as a new type of financial service. Since January 1, 2020, any company wishing to provide cryptocurrency custody services must obtain permission from BaFin.

Germany implemented the fifth EU Anti-Money Laundering Directive (AMLD5) in 2020, requiring Crypto Assets exchanges and wallet providers to comply with strict AML/CTF regulations. In May 2021, the German Federal Parliament passed the Electronic Securities Act, defining crypto securities and categorizing them as a subcategory of electronic securities.

In 2022, the Federal Ministry of Finance of Germany published the first national Crypto Assets tax guideline "Individual Issues Regarding the Tax Treatment of Virtual Currencies and Other Tokens", which covers tax scenarios such as mining, staking, lending, hard forks, and airdrops, further improving Germany's encryption regulatory framework.

5. Summary and Outlook

Germany has demonstrated an inclusive and friendly attitude towards Crypto Assets, aiming to balance innovation incentives with risk management. In terms of the tax system, this is mainly reflected in the tax exemption for small gains, tax benefits for personal investments, and VAT exemptions. Regarding the regulatory system, Germany's Crypto Assets regulatory environment is considered one of the most friendly in Europe, providing a safe and transparent investment environment for Crypto Assets investors.

In the future, Germany may continue to optimize its Crypto Assets tax policy to adapt to market developments and the needs of international cooperation. The regulatory framework also needs to remain adaptable to address emerging challenges and opportunities. Germany may strengthen its cooperation with other countries and international organizations in the regulation of Crypto Assets to promote the harmonization of global regulatory standards.

The development of Germany's Crypto Assets tax and regulatory system is providing increasingly clear guidance and incentives for the country's Crypto Assets industry, with the hope of creating an ecosystem conducive to the healthy development of Crypto Assets, thereby feeding back into the prosperous development of the German economy.