Crypto Regulations in Germany: Key Features
By Iaroslava Kramarenko 152 18 Sept 2023
In 2022, Germany, as highlighted by Coincub Global Crypto Ranking, emerged as the most crypto-friendly European nation. Will it maintain its lead? Let’s delve deeper into the German regulatory landscape.
Crypto Regulations in Germany
Cryptocurrencies in Germany are recognized as legitimate assets but aren't accepted as a method of payment. Instead, they're classified by regulatory bodies as financial tools or assets, and they're governed by laws pertinent to securities and investments.
The central authority that oversees the German market is the Federal Financial Supervisory Authority (BaFin).
In 2020, Germany introduced a law requiring every crypto exchange in its jurisdiction to secure a license from BaFin. The license application requires:
- Evidence of the legitimate origin of the company's starting capital;
- An exhaustive business strategy, which includes a business plan covering the initial three years;
- Proofs of the integrity and professional credibility of top managers, which includes a confirmation that founders have no criminal history;
- An assessment of financial security from independent supervisory bodies.
In essence, the licensing procedure is comprehensive and can be lengthy.
Moreover, this law mandates crypto platforms to abide by anti-money laundering (AML) standards and counter-terrorism financing (CTF) measures. This means platforms must engage in client identification and verification, keep an eye on transactions, and report any suspicious activities. Companies that neglect AML and KYC guidelines might face penalties of up to €500,000. Firms found facilitating money laundering or being involved in financing terrorism are subject to fines as high as €10 million.
Crypto Taxes in Germany
In Germany, profits from cryptocurrencies are taxed under personal income, with a rate of 42%. This is considerably high, especially when compared to its neighbor, Austria, which taxes at a rate of 27.5%.
Given this, one might infer that Germany isn't especially welcoming to the crypto players.
But, as with many things, there's more beneath the surface…
Several noteworthy exceptions can influence how cryptocurrency earnings are taxed in Germany:
1. Long-Term Investments: Those who invest in cryptocurrencies and retain their holdings for more than 12 months are exempt from taxation. This suggests that if an individual holds onto their cryptocurrency for at least a year post-purchase, they can later sell it without needing to pay tax on the profits.
2. Tax-Free Threshold: If an individual's annual profit from cryptocurrency sales doesn't exceed €600, that profit remains untaxed. This applies individually across different asset classes (NFTs, stablecoins, tokens, and standard coins).
3. Cryptocurrency as Salary: Employers in Germany can disburse up to 25% of an employee's salary in the form of cryptocurrency, often opting for stablecoins. However, this doesn't affect the tax-free allowance, which, from July 1, 2023, is set at €1402. This portion of one's salary must be given in traditional fiat currency. For the segment of salary received in cryptocurrency, the long-term holding rule applies. So, if this portion is invested and held long-term (like in BTC), it isn't subject to taxation.
4. Annual Income Reduction through Crypto Losses: If a trader experiences losses from cryptocurrency trading or exchanges, these losses can be used to reduce their overall taxable income for the year. If there were losses from the preceding year, they can be carried forward to offset gains in the current year.
5. Mining Taxes: Income generated from cryptocurrency mining is tax-free if it doesn't surpass €256 annually. Expenses associated with this mining activity can also be declared as operational costs in the annual tax returns.
6. Undefined Rules for Airdrops: Currently, there aren't any distinct regulations addressing profits from crypto airdrops. Given that tokens received from airdrops aren't bought, this income is perceived as a “windfall.” As such, it doesn't fall under the regular income tax regulations. This leniency also extends to the tokens received as gifts.
7. NFT Sales by Creators: NFTs crafted and sold by artists are deemed a part of a small business's creative output. Activities centered around hobbies or artistic pursuits aren't typically subject to personal income tax. So, an NFT creator who earned less than €22,000 the previous year and no more than €50,000 in the current year isn't taxed on these earnings.
To further decrease their taxable amounts, traders often adopt the FIFO (First In, First Out) method. In practice, this means that they track when assets are acquired and aim to convert them back to fiat only after holding them for at least a year. This approach is equally relevant to miners or stakers, who prioritize selling coins or tokens they received from mining or staking a year earlier.
A fundamental principle in Germany's crypto taxation is that tax liabilities only arise when the cryptocurrency is converted to fiat money. If this conversion takes place after holding the asset for a year, then the sale is tax-free.