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Crypto Investments in Foundations: Beneficial Tax Treatment of Staking Income in Germany

Crypto Investments in Foundations: Beneficial Tax Treatment of Staking Income in Germany

Large assets necessitate dependable, legally secure structures. Foundations, both charitable and family-based, have consistently played a significant role in the wealth planning of affluent individuals. Foundations can also provide various tax benefits, including those associated with crypto assets.

Common goals among founders

Traditionally, the typical founder is a successful entrepreneur or retiree freelancer considering the succession of their wealth. However, in recent years, younger individuals have been increasingly establishing foundations. Many early crypto investors, who have amassed substantial wealth through cryptocurrencies, are also becoming founders. The common thread among most founders is their desire to manage their assets in a manner that suits their needs, structures their wealth, protects it, and ensures their closest relatives are cared for. Tax motives are often a factor as well.

Asset transfer to the foundation

The skill in establishing a foundation lies in transferring assets to the foundation in a tax-efficient way. This is straightforward with charitable foundations, as asset transfers to them are tax-exempt. The situation differs for family foundations, where special expertise is needed. However, once the assets have been transferred to the foundation, the current taxation of certain income is highly appealing.

Staking as a private investment form for crypto investors

Staking is a traditional method for crypto investors to earn a continuous return on their assets. With staking, investors lock their coins for a certain period, during which they cannot use them, and receive compensation for this – typically in the form of crypto assets. The German Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) considers this to be income under Section 22 EStG, or income from other services. This is taxed at the individual income tax rate, which, in the worst-case scenario, is at the maximum tax rate (total including church tax and solidarity surcharge: approximately 48 per cent). Nearly half of the income, therefore, goes to the state.

We believe that this classification of staking income is inherently incorrect. In our view, staking income is income under Section 20 EStG, i.e., capital income subject to withholding tax (total including church tax and solidarity surcharge: approximately 28 per cent). The German Federal Financial Court (Bundesfinanzhof, BFH) regards at least Ether, Bitcoin, and Monero as analogous to foreign currencies and acknowledges that cryptocurrencies are typically used as a means of payment. By law, Section 20 EStG takes precedence over income under Section 22 EStG. Moreover, the termstaking” is often used in a rather generalized manner. Upon closer examination, it becomes apparent that what the crypto investor is doing is not staking in the traditional sense, meaning the BMF’s requirement does not apply (e.g., the BMF explicitly only addresses the staking of coins, not tokens).

We, therefore, anticipate that the classification of staking income as capital income will eventually be accepted. Currently, however, investors must still rely on legally enforcing their perspective, which differs from that of the BMF (appeal proceedings, tax court proceedings).

Tax treatment of staking in foundations in Germany

If a foundation participates in staking, the tax implications are straightforward. A foundation is consistently subject to a corporate tax of 15 percent plus a solidarity surcharge (totaling 15.825 percent). Income generated from staking is taxed at this rate. There’s no complex differentiation between capital gains tax and individual tax rates like there is for private individuals. Trade tax is not applicable as long as the foundation isn’t primarily involved in commercial activities with its staking activities, which is a rare occurrence.

Distributions to the beneficiaries of the foundation are subject to an additional tax rate of approximately 28 percent (refer to the above: investment income). The advantageous tax treatment of staking within a foundation is particularly appealing to those who are not planning immediate distributions but, as is typically the case, prefer to let their assets within the foundation accumulate over time and reinvest them back into the foundation.

Suggestion: Staking in foundations

For crypto investors who utilize the investment strategy of staking, a foundation can also be financially beneficial from a tax standpoint – another reason to consider the versatile legal structure of a foundation at an early age. We would be pleased to address your inquiries.

Read more:
Taxation of Staking and Block Rewards in Germany
Optimizing Taxation in Germany with Investment GmbH/Asset Management GmbH

Stefan Winheller

Attorney Stefan Winheller has specialized in tax law for about 20 years, especially in the areas of cryptocurrencies, foundations/nonprofits and international tax law.

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