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DeFi Tax German Guide

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DeFi Tax: German Guide

Last updated: Tuesday, 31 May 2022

The DeFi market has boomed since 2020 and is now worth more than €100 billion. But as with all profits, the BZSt will want their cut. Although Germany still has some of the most generous crypto tax laws around, there are many instances where you'll need to pay tax on your DeFi investments. We're looking at everything you need to know about DeFi tax in Germany in our guide, including liquidity pool tax, staking tax and more.

Is DeFi crypto taxed in Germany?

Yes, short-term DeFi profits are taxed under Income Tax by BZSt, while long-term profits are tax free. While the German tax office has not offered guidance on every type of DeFi transactions, we know that income from staking is definitely taxable in most instances. This provides a safe assumption that other DeFi activities are taxable too. The tax you'll pay (and whether you'll pay it) all depends on how much you earn in a financial year, as well as how long you've held the asset. Let's dive into it in-depth.

What is DeFi?

DeFi stands for Dezentrale Finanzierung (Decentralised Finance). 

It's an all-encompassing term for the huge ecosystem of financial apps built using blockchain technology - predominantly on the Ethereum blockchain.

In brief, DeFi looks to tackle the limitations of traditional financial markets and grant more financial freedom to people globally by removing centralised third parties, regulations, internal policies and human error.

What is DeFi?

If you want to know more about DeFi in general, we have a great in-depth guide on all things DeFi.

How does DeFi work?

So if there’s no centralised third party like a bank or even a crypto exchange, how does it all work and who’s running the show?

Investors make each protocol work by utilising liquidity pools. 

Almost all DeFi protocols (apps) rely on liquidity pools in order to function. This includes decentralised exchanges, decentralised lending protocols, decentralised staking protocols and more - the names might vary a little but they all work in effectively the same manner.

Investors add or stake their assets in these pools in order to earn rewards as a return. These rewards are usually a proportional percentage of the transaction fees from the pool, but for certain protocols, investors will receive additional tokens such as governance tokens, as a reward too.

The liquidity added to the pool is used to finance the various transactions that the protocol offers, for example, trades, loans or more.

All of the various transactions offered by DeFi protocols are automated by smart contracts - essentially pieces of digital code that set the terms of a transaction and execute said transaction.

Smart contracts can be used to automate pretty much any transaction you can think of - a developer just needs to write it. Let’s take a look at some examples.

Examples of DeFi protocols

There is a DeFi protocol for practically every centralised financial service you can think of. Examples include:

  • Decentralised exchanges or dexes like Uniswap, SushiSwap and PancakeSwap where you can buy, sell and trade crypto.
  • Decentralised web wallets like MetaMask and Atomic Wallet that let you store, send and receive crypto, as well as interact with the DeFi ecosystem across multiple blockchains.
  • Decentralised NFT marketplaces like OpenSea or Rarible where you can buy, sell and trade NFTs, as well as specific NFT lending protocols like BendDAO where you can loan your NFTs for collateral.
  • Decentralised lending protocols like Compound and Aave where you can both borrow and loan crypto, and earn interest for doing so.
  • Decentralised bridge protocols like RenVM and WBTC that let you move tokens from one blockchain to another.
  • Decentralised yield farming protocols like Convex Finance that pay you a reward for staking your liquidity pool tokens or staking pool tokens on their platform.
  • Decentralised yield aggregator protocols like Yearn Finance that help investors find the best yields available automatically. 
  • Decentralised derivatives protocols like dYdX or Synthetix that allow investors to gain exposure and leverage to underlying crypto assets.
  • Decentralised options protocols like Opyn or Ribbon Finance that give investors the right to buy an asset at a fixed price in the future.
  • Decentralised insurance protocols like Armor or Nexus Mutual that provide investors with financial protection against their investments.
  • Decentralised payment protocols like Lightning Network or Flexa that let you pay or receive payment in crypto.
  • Decentralised indexes like Set Protocol and Index Coop that let you diversify and balance your crypto portfolio automatically.
  • Decentralised synthetic protocols like Alchemix and Injective that offer tokenized derivatives that mimic the value of other assets.
  • Decentralised play-to-earn gaming protocols like Aavegotchi and Decentraland where you can play and earn crypto as a reward, as well as earn in game by trading and selling NFTs.
  • Decentralised gambling protocols like Polymarket and BetHash where you can bet on pretty much anything.

How do you make money with DeFI?

As you can see from the wide array of DeFi protocols available, there's plenty of ways for German crypto investors to make money with DeFi, including:

  • Buying, selling and trading crypto on dexes.
  • Providing liquidity to dexes, lending protocols and more.
  • Staking your liquidity pool tokens on other protocols, and then even staking these tokens on yet another protocol.
  • Playing DeFi games and earning rewards.
  • Staking directly as part of a PoS consensus mechanism using a non-custodial wallet.
  • Utilising the huge range of DeFi protocol options available like options, derivatives, synthetics, gambling and more.

In effect, the options are endless. DeFi is incredibly popular because of its composability. This means the ease of stacking protocols on top of one another. For example, when investors provide liquidity on the Curve protocol, they get CRV tokens as a reward, which they can then stake in Convex Finance. You'll then get CVX tokens as a reward, which you can lock in Convex Finance and earn more platform fees.

It's great news for German cryptocurrency investors looking for a variety of opportunities to earn. But there's a catch - the BZSt will want their cut where transactions are taxable. And with such a wide variety of transactions available... the tax implications can get complicated to say the least.

DeFi tax in Germany

The BZSt hasn't issued specific guidance on how Germany will tax DeFi transactions, even in their recently updated guidance (2022). This said, the BZSt has issued very clear guidance on how certain crypto transactions are taxed in Germany already - including staking, trading and more. What Deutschland Kryptowährung Investoren, or investors need to do is interpret the current German crypto tax guidance (or get a crypto accountant to do it) and apply the interpretation to their DeFi transactions.

The BZSt is clear that crypto is subject to Income Tax - but only in specific circumstances and it’s all to do with how long you’ve held your crypto for, and how if you’re viewed as an investor or a business. So let’s cover the basics.

DeFi tax Germany

DeFi Private Income vs Capital Income

When you sell, swap or spend crypto you may need to pay Income Tax on the profit as a result. However, this only applies for short-term investments, so crypto you’ve held less than a year. Germany isn’t interested in taxing long-term gains - that is from assets you’ve held for a year or more - so provided you’ve held your crypto for at least one year, you won’t need to pay tax on any profits as a result when you sell, swap or spend it. The same should go for long-term gains made from DeFi transactions.

Income Tax DeFi Germany

However, if the gains you’ve earned are under the legal threshold of €256 per financial year, then any income - be it short or long-term, would not be subject to Income Tax. 

When Income Tax is applicable to your transactions - so for gains made under a year of crypto ownership, you'll pay Income Tax at your regular Income Tax rate - up to 45% plus the 5.5% solidarity surcharge.

When it comes to earning crypto - like through staking or earning new tokens through liquidity mining - it’s a little more complicated. In general, rewards will generally be subject to Income Tax under section 22, no.3 of the German Income Tax Act (EStG). 

Earning crypto Germany tax

We’ll pause here to note that because there is no specific guidance around a variety of DeFi transactions (particularly liquidity mining, margin trading and derivatives) there is a lot of ambiguity around whether the profits generated should be viewed as capital income or private income. This matters because they have very different tax treatment. 

Private income is taxed at the regular Income Tax rate, while capital income enjoys a much lower 25% flat tax rate (but many limitations when it comes to offsetting losses). If you’re unsure and you want to optimise your tax position, you should consult with a crypto accountant who can advise you.

Private vs. Capital Income Germany

With that brief summary out the way, let’s take a quick look at a variety of DeFi transactions and how they might be taxed.

Want to know more about German Crypto Tax? Check out our kryptowährung steuer guide.

Buying, selling and swapping on dexes

The BZSt has clear rules on this. Buying crypto with fiat currency is always tax free, while selling and trading crypto may be taxed depending on how long you’ve held your asset.

If you’ve held your crypto for less than one year, you’ll need to pay Income Tax on any profit you make from selling or swapping crypto on both centralised and decentralised exchanges.

If you’ve held your crypto for more than one year, you don’t need to pay Income Tax at all when you sell or swap crypto. It’s important to note though that when you swap crypto for another crypto - your new cryptos holding period starts the day you make the swap. So you’ll need to hold it for another year before it benefits from being tax free.

Selling or swapping tokens you've held less than a year

If you've held your tokens for less than one year, then your transaction when you sell or swap your tokens is taxable. You'll need to pay Income Tax on any profits you make from a sale or swap at your normal Income Tax rate.

INCOME TAX

Selling or swapping tokens you've held more than a year

Held your tokens for more than one year? Great news - disposing of them by selling or swapping them is tax free. If you make a swap, your holding period for the new token will start the day you make the swap.

TAX FREE

Liquidity pool steuern

Liquidity pools and tax all comes down to two things:

  1. How the specific protocol you’re using works.
  2. How long you’ve held your asset for.

In general, when you add to a liquidity pool - whether that’s a dex liquidity pool or a lending pool - you’ll get tokens in return, also known as LP tokens or SLP tokens depending on the pool.

Your rewards from adding to the pool are then paid out in one of two ways (or both!). Your LP tokens will accrue value, or you may be rewarded with new tokens. This is much easier to understand with an example so we’ll use Compound Finance as an example.

When you add liquidity to Compound Finance, you’ll get cTokens in return representing your asset in the pool. Your cTokens will accrue value based on the underlying asset in the pool. For participating in Compound Finance, you’ll also be rewarded with COMP tokens - a governance token. So you’re earning in two different ways - which presents a couple of different tax implications for German crypto investors - depending on how long you’ve held the asset for.

If you’ve held your asset for less than a year, you’ll need to pay tax when you add and remove liquidity. From a tax perspective, this is likely a swap in the eyes of the BZSt. You’re trading one token and receiving another - it doesn’t matter that you’re going to swap it back at a later date. So you’ll need to pay Income Tax when both when you add liquidity using an asset you’ve held less than a year, and when you remove liquidity using an asset you’ve held less than a year.

If you’ve held your asset for more than a year - it’s good news, because these transactions are tax free. You won’t need to pay Income Tax when you add liquidity using an asset you’ve held more than a year and you won’t need to pay Income Tax when you remove liquidity using an asset you’ve held more than a year.

What is important to note though is when you remove your asset from the pool - your holding period resets. In the eyes of the BZSt, this is you acquiring a new asset - so you’ll need to hold for another year before you can enjoy the long-term gains tax break again. Similarly, when you receive liquidity pool tokens - these are seen as an acquisition, so if you haven’t held them for a year when you trade them back, you’ll need to pay Income Tax on any profit. In other words, be strategic with the assets you add and remove from liquidity pools and when you do it!

When it comes to earning new tokens through liquidity or lending pools - this all depends on how much you’re earning. You’ll need to identify the fair market value of the tokens on the day you received them in EUR and add this up to get a total figure. If you have more than €256 in additional income throughout the financial year - you’ll need to pay Income Tax at your regular Income Tax rate.

Adding liqudity to a liquidity pool

Adding liquidity to a pool? Whether you'll pay tax or not depends on how long you've held the token(s).

If you receive liquidity pool tokens in return and you've held your asset less than one year - this is likely going to be seen as a swap and you'll need to pay Income Tax on any profit as a result.

If you receive liquidity pool tokens in return and you've held your asset more than one year - this transaction would be tax free.

POTENTIAL INCOME TAX

Removing liquidity from a liquidity pool

Like above, when you're removing liquidity from a pool - it all depends on how long you've held your liquidity pool tokens for.

Your holding period for your liquidity pool tokens starts the day you received them (when you added liquidity). If you've held your liquidity pool tokens less than one year, you'll pay Income Tax on any profits when you trade your liquidity pool tokens back for your original capital and rewards. If you've held your liquidity pool tokens more than one year, you'll pay no tax at all.

POTENTIAL INCOME TAX

Earning new tokens through liquidity pool mining

Some DeFi protocols pay out specific tokens as a reward for investing in their protocol. If you're earning new tokens through liquidity pool transactions, then you may need to pay Income Tax depending on how much you've made in additional income throughout the financial year. If you've earned more than €256 in additional income (from crypto and all other additional income) - then you'll need to pay Income Tax. If you've earned less than €256 in additional income (from crypto and all other additional income) then you won't need to pay Income Tax.

You can calculate how much you've made from new tokens by identifying the fair market value of any tokens on the day you received them in EUR.

INCOME TAX

Crypto staking steuern

There are two kinds of staking in the DeFi world - staking protocols and staking as part of a PoS consensus mechanism. It matters because they may have different tax implications - but we’ll cover both.

If you’re using a non-custodial wallet to stake as part of a PoS consensus mechanism - for example, Yoroi or Daedalus to stake ADA on the Cardano blockchain, then the rules are pretty straightforward. Your staking rewards from PoS staking may be subject to Income Tax depending on how much you earn in additional income throughout the financial year.

If you have more than €256 in additional income throughout the financial year - you’ll need to pay Income Tax at your regular Income Tax rate. If you have less than this, you will not need to pay Income Tax. To get your total figure, you’ll need to identify the fair market value of your staking rewards in EUR on the day you received them and add up these figures to get your total additional income figure.

When it comes to DeFi staking tax in Germany - it depends on how your specific DeFi protocol works. If you receive tokens in return for your staked asset - for example if you used Lido to stake ETH, you’d get stETH tokens - this is likely more akin to a crypto to crypto trade. So the tax you’ll pay all depends on whether you’ve held your asset for a year or less. If you’ve held your asset for less than a year, you’ll need to pay Income Tax on any profit when you stake your asset. Similarly, when you want to unstake your asset, if you’ve held your staking tokens for less than a year, you’ll need to pay Income Tax on any profit as a result of the transaction. Like above, moving your asset in and out of staking protocols in these instances will be seen as an acquisition - so your holding period will reset to zero and you’ll need to wait a year to transact with these assets tax free.

There are, however, staking pools where you’ll be paid out new tokens instead. For example, if you stake your PancakeSwap LP tokens in the PancakeSwap farms - you’ll get CAKE tokens. In these instances, the rules are the same as the staking rules above - it all depends on how much additional income you earn throughout the financial year, in total. If it’s less than €256, you don’t need to pay Income Tax. If it’s more than €256, you’ll need to pay Income Tax. To identify how much you’ve earned, take the fair market value of your tokens you’ve earned throughout the financial year and add these figures up (alongside any other additional income) to get your total additional income for the year.

An important note here - previously the guidance from the BZSt was that tokens used in staking (whether part of a staking pool or a PoS consensus mechanism) used to need a 10 year holding period before they would be tax free. This fortunately isn’t the case any longer as of May 2022. The holding period for staked tokens is now the same as the holding period for other crypto - gains are tax-free after one year.

Yield farming steuern

Like above, the tax you’ll pay on crypto yield farming in Germany all depends on how your specific protocol works and how long you’ve held your asset for. Broadly speaking, there are a few different tax implications here:

  • If you’re adding liquidity to a yield farming protocol and you receive tokens in return, you will pay Income Tax on any profits if you’ve held your asset for less than a year. If you’ve held your asset for more than a year, you do not need to pay Income Tax on profits.
  • If you’re removing liquidity from a yield farming protocol and you trade tokens to do so, you will pay Income Tax on any profits if you’ve held your tokens for less than a year. If you’ve held your tokens for more than a year, you do not need to pay Income Tax on profits.
  • If you’re earning new tokens through a yield farming protocol, you may need to pay Income Tax on new tokens, depending on how much you earn in additional income throughout the financial year. If you earn more than €256 in additional income a year, you’ll need to pay Income Tax. If you earn less than €256 in additional income a year, you will not need to pay Income Tax on crypto income.

Spending crypto tax

In Germany, whether you’re spending crypto on goods and services, on interest fees or even gas fees - they all have different tax implications. As ever, it depends on how long you’ve held the asset as to whether your transaction will be subject to tax.

If you’ve held your crypto for less than a year, you’ll need to pay Income Tax on any profits you make from disposing of your asset. This means you need to take your original purchase price (plus any fees) and subtract it from the fair market value of your crypto on the day you spent it.

If you’ve held your crypto for more than a year, spending it is a non-taxable transaction and you won’t need to pay tax on your profits.

An important note here is that gas fees may be able to be added to your cost basis (how much your crypto cost you to acquire) depending on the transaction you’re undertaking. Transfers are unlikely to be able to be added to your cost basis, but transaction fees (like trading, buying or selling fees) are often allowable. 

Crypto margin trading and derivatives tax

Though they're often lumped in the same breath, margin trading, derivatives and futures all have different tax treatment... and it gets complicated fast. It's important to note the BZSt has not released guidance on the tax implications of crypto margin trading, crypto derivatives and crypto futures yet - however they have guidance on these products in traditional markets... so let's dive in.

Margin trading? Profits from margin trades can only be classified as capital income if no crypto is delivered but the difference is settled. Meanwhile, if crypto is delivered, this would be viewed as a private sales transaction instead. These two have different tax treatments:

  • Capital income is taxed at a flat 25% rate (known as a withholding tax). 
  • Private sales transactions are taxed at your regular Income Tax rate if the income is from an asset held less than one year. More than one year and your profits are tax free.

It's also important to note for capital income that you can only deduct up to €801 per year in income-related expenses (for example trading fees) and the one-year holding period does not apply.

Meanwhile for derivatives, the tax paid depends on the specific product. Similar to margin trades - it depends on whether the investor ends up acquiring the underlying crypto asset. If your product does not result in you acquiring crypto and instead you end up with the settlement of the difference, the profits will be viewed as capital income and taxed at a flat 25% rate.

Meanwhile, if you end up acquiring crypto at the point you close your position, this will be viewed as a private sales transaction and profits will be subject to the Income Tax rate.

It's important to note that for all of these transactions - you'll only be liable for tax at the point you close your position.

Another important thing to consider is there was a change in the law in 2021 that means for many futures transactions (and potentially some other derivatives products and margin trades) that losses can no longer be offset against income from capital assets without restriction. To elaborate, losses from futures transactions may only be offset against profits from futures transactions and income from options transactions - and there is a €20,000 loss offset limit. 

We recommend you speak to a crypto accountant to help you navigate your tax burden when dealing with crypto margin trades, derivatives or futures.

NFTs tax

NFTs are largely treated the same as other cryptocurrencies from a tax perspective in Germany - although there are a few exceptions to this rule and it all depends on whether you’re creating the NFTs in question.

If you’re creating NFTs - like an artist with a paintbrush - income from this activity is going to be considered income from an artistic activity or commercial income. It all depends on your individual circumstances. If you have income from an artistic activity, you'll pay Income Tax at your regular Income Tax rate. If you have commercial income, you'll also need to pay Trade Tax in addition to Income Tax. If you're selling NFTs at scale, since the BMF have released no guidance on this yet, we recommend you consult with a crypto accountant.

Meanwhile, if you're buying, selling and trading NFTs not as a creator - it's likely these transactions will be treated much the same as other crypto transactions. They'll generally be classed as private sales transactions and therefore tax will be based on your holding period. If you've held your NFT for less than one year, you'll pay tax on any profit as a result of a sale or swap. If you've held your NFT for more than one year, you won't pay Income Tax.

When buying NFTs - as you buy using cryptocurrency - these transactions may also be taxed, if you've held the crypto you're using to buy with for less than one year. In other words, be strategic with the crypto you use to purchase NFTs to avoid paying tax in Germany!

Play to earn tax

Unsurprisingly, the BZSt hasn’t released any guidance on the tax implications of various DeFi play-to-earn activities. But we can broadly interpret the tax implications using the guidance we’ve already covered above.

If you’re earning new tokens as a result of playing a DeFi game - for example, earning SLP tokens on Axie Infinity - you may need to pay Income Tax. It’ll all depend on how much you’ve earned in additional income. More than €256 in additional income (from crypto and all other additional income) in a financial year and you may need to pay Income Tax. You can calculate this by identifying the fair market value of any tokens in EUR on the day you receive them. Less than €256 in a financial year and you do not need to pay Income Tax.

If you’re trading, buying and selling NFTs - you may need to pay Income Tax. It all depends on whether you’re creating the assets and how long you’ve held them.

If you’re creating NFT assets at scale to sell - for example, clothes in Decentraland - then this could be considered commercial income and you may be liable for both Income and Trade Tax.

Meanwhile, if you’re buying, trading or selling NFTs (that you did not create) you’ve held less than one year - you’ll need to pay Income Tax on any profits. If you’ve held your NFTs for more than one year, you do not need to pay Income Tax to Germany’s tax office on your NFT profits.

How to simplify your DeFi taxes

We get it. All of the above is a lot to consider when doing your German crypto taxes - so make it simple with Koinly.

All you need to do with Koinly is sync the exchanges, wallets and blockchains you use via API or by uploading a CSV file of your transaction history. We support all the popular DeFi wallets like MetaMask, Trust Wallet, Coinbase Wallet, Phantom, Keplr and many more.

Once you’re connected to Koinly, it’ll calculate everything you need for your crypto taxes, including your cost basis for each asset, your short and long-term capital gains and any income. All this information is packaged up in your tax summary and ready to download in your crypto tax report, so you can file with the BZSt with ease, or hand it over to your accountant.

Koinly makes crypto tax simple. Try it free today.

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