Cryptocurrencies such as Bitcoin and Ethereum have long been more than just objects of speculation. They are increasingly being used as a means of payment or for lending (loans). But how should a loan that is granted in cryptocurrency and also repaid in cryptocurrency be treated for tax purposes? This article provides a practical overview for private individuals.
What is a crypto loan?
A crypto loan is when one person provides another with a certain amount of cryptocurrency (e.g., Bitcoin) for an agreed period of time. At the end of the term, the lender receives the cryptocurrency back – usually plus a fee (interest), also in cryptocurrency.
Tax classification: Economic asset rather than capital
In Germany, cryptocurrencies are treated as economic assets for tax purposes and not as traditional means of payment or capital within the meaning of tax law. This has a decisive impact on the tax treatment of a crypto loan:
The transfer of cryptocurrency as part of the loan is not considered a taxable transaction. The same generally applies to repayment, i.e., the repayment of the loan.
Interest from crypto loans: Income from other services
If the lender receives remuneration for lending their cryptocurrency (e.g., in the form of additional coins), this interest income is generally taxable as income from other services in accordance with Section 22 No. 3 of the German Income Tax Act (Einkommensteuergesetz, EStG):
Exemption limit: Up to EUR 256 per year, the income remains tax-free if the taxpayer has not received any other income from other services. If the limit is exceeded, the entire amount is taxable at the personal income tax rate.
Time of taxation: The decisive factor is the time when the interest is received. The value of the cryptocurrency received is converted into euros at the time of receipt and recorded as income.
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Capital income? Since cryptocurrencies are not legal tender, interest payments are not considered capital income under Section 20 EStG, at least in the opinion of the tax authorities, but rather income from other services. In light of a Federal Fiscal Court (BFH) ruling that cryptocurrencies are economic goods that are “structurally comparable to foreign currencies” (BFH, ruling of February 14, 2023, IX R 3/22, NJW 2023, 867) and according to which cryptocurrencies “from an economic point of view … are to be regarded as means of payment”, there are good reasons to question the tax authorities’ view and to subject interest income to taxation in accordance with Section 20 (1) No. 7 EStG (flat-rate withholding tax of 26.375% instead of personal income tax rate). Lenders who wish to do so should explain their position to the tax office in a cover letter accompanying their tax return, just to be on the safe side.
Repayment of the loan: Tax consequences
There is one important exception to the principle that the repayment of a crypto loan remains tax-free: If a cryptocurrency other than the one given is returned to the lender for the purpose of repayment, or if repayment is made in euros, this can be regarded as an exchange transaction between the currency given and the currency received and thus trigger a so-called private sale transaction in accordance with Section 23 EStG, provided that less than one year has elapsed between the granting of the loan and its repayment. The profit (or loss) resulting from this exchange is then relevant for tax purposes. A profit is taxable at the income tax rate if the exemption limit of § 23 EStG in the amount of EUR 1,000 is reached.
The tax treatment of crypto loans in Germany requires individual review and careful contract drafting
The tax treatment of crypto loans in Germany depends largely on whether and in what form remuneration is paid and how the loan is repaid. Anyone who grants or takes out crypto loans should be aware of the tax implications and take them into account when drafting contracts.
Our experienced tax experts will be happy to advise you on all aspects of crypto loans and their tax treatment. Feel free to contact us.
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