Germany was one of the first countries in the European Union to develop a legal framework to regulate cryptocurrencies. At the legislative level, mining, trading, and the issuance of digital assets are allowed. We have studied the specifics of German cryptocurrency legislation for legal entities and individuals and will share this information with you.
Legislative Framework for Cryptocurrency Regulation in Germany
On the technical and legal side, the classification of digital assets was defined by the Federal Financial Supervisory Authority (BaFin) back in 2011. According to the Banking Act (Kreditwesengesetz), digital assets began to be considered financial instruments and units of account.
In 2013, BaFin published a precise explanation detailing the legal status of Bitcoin. The document treats BTC as a digital currency and can be used as a unit of account for trade transactions between individuals. In addition, according to the Payment Services Supervision Act (ZAG), electronic money is any equivalent of monetary value in the form of a claim to an issuer that is stored electronically or on magnetic media and can be used for payment transactions.
The German regulatory framework classifies digital assets as follows:
- Cryptocurrency tokens. Cryptocurrency tokens that can be used for payment or storage.
- Security tokens. Digitally represented securities that give holders access to potential profits and the right to invest and participate in the management of business projects.
- Utility tokens. Utility tokens that do not entitle the holder to dividends. However, they do give the holder access to certain services or products on the blockchain network.
In 2017, cryptocurrency was officially recognized as a legal financial instrument at the level of the German Federal Government. In 2022, Germany remains one of the most loyal countries in the European Union regarding the regulation of digital assets. Companies and individuals can count on low tax rates, and mining is exempt from tax altogether. At the same time, German parliamentarians continue to work on improving the legal framework and working out the rules for regulating digital assets.
Cryptocurrency For Legal Entities
Legal entities wishing to register a blockchain company are automatically defined by law as financial structures. Such companies must obtain a special license to operate legally. As a rule, such structures are registered as Gesellschaft mit beschränkter Haftung (GmbH) — a limited liability company.
The basic legal requirements for the registration of a blockchain company in Germany:
- Authorized capital of at least €730,000.
- Compliance with tax reporting to BaFin.
- Compliance with AML policy.
In addition, the owners of the company to be registered must prepare and submit several notarized documents to BaFin, such as:
- detailed business plan for the project;
- overview of the company structure;
- Due diligence report: an evaluation of investment risks, the object of investment, a comprehensive study of the company’s activities;
- planned security measures and an IT development strategy, such as the software used.
Registered blockchain companies pay corporate income tax at a standard rate of 15%. Depending on the city in which the company is registered, the income tax rate can be higher, e.g. Berlin at 30% or Munich at 33%.
The most attractive city for registering blockchain companies is Berlin. It is where Germany’s largest blockchain business community, called Bitcoin Kiez (Bitcoin whales), is concentrated. Restaurants, bars, stores, and other establishments that accept BTC are located near each other in the Graefestrasse area.
In addition, there are many crypto exchanges in Germany where users can exchange or buy digital assets. For example, Luno, Coinmama, Coinbase, and others.
Cryptocurrency for Individuals
Cryptocurrencies in Germany are defined as digital assets. Individuals can use digital assets to pay for purchases and make transactions to issue, exchange, and trade crypto-assets. Cryptocurrency transactions are exempt from VAT and are not subject to capital gains tax.
According to Coin ATM Radar service, there are more than 90 crypto ATMs in Germany. Most of them are installed in Berlin — 10, and 9 Bitcoin ATMs work in Dusseldorf and Stuttgart.
In May 2022, the German Ministry of Finance published a document describing the details regarding the payment of income tax by individuals concerning transactions with digital assets. Thus, the Ministry of Finance, in cooperation with the financial institutions and the governments of the German federal states, defined the following:
- if citizens have bought or leased cryptocurrency for more than one year — no income tax is payable;
- holding digital assets for more than one year and selling them afterward is also not taxed;
- holding and selling digital assets during one year is subject to income tax if transactions exceed €600.
Also in 2013, BaFin established that cryptocurrency mining is not subject to legislative regulation and is fully exempt from VAT. In addition, the government has not imposed a legal ban on the import or export of digital assets.
Germany was one of the first in the European Union to regulate the cryptocurrency market; the relevant legal framework has been under development since 2011. The regulation is loyal, and a flexible taxation system facilitates its development. Private crypto investors and blockchain companies get opportunities to develop the technological base and various kinds of financial projects, which has a positive effect on the FinTech sector and the country’s economy as a whole.
