Taxation of Minting in Germany

Minting: Tax and Differentiation from Mining, Forging and Staking

Taxation of minting income in Germany

In the world of cryptocurrencies, there are various processes that help to secure and validate transactions and create new coins or tokens. The most important of these include mining, forging, staking and minting. Each of these terms describes different mechanisms within blockchain technology, but they all have the goal of stabilizing and expanding the network.

The terms sometimes overlap and are not always used neatly according to their true meaning. Forging, staking and minting are often based on the PoS (Proof of Stake) process, which is why these terms are sometimes used as synonyms. However, it is important for users and advisors in regulation and tax to be able to clearly separate the terms and understand their specifics. What is minting? What is forging?

Minting Tax Germany | Law Firm

Mining

Mining is the best-known process and is mainly used in connection with proof-of-work (PoW) blockchains such as Bitcoin. Miners use powerful computers to solve complex mathematical problems. By solving these problems, new blocks are added to the blockchain and miners are rewarded with new coins and transaction fees. This process requires significant computing power and energy, making it resource intensive.

Forging and Staking

Forging is a term that is often used in connection with proof-of-stake (PoS) blockchains (e.g. Ethereum). Here, new blocks are created by holding and locking cryptocurrencies. Participants who stake a certain amount of coins have the chance to create new blocks and receive rewards. Forging always requires the use of a node for the validation process, while (passive) staking regularly does not use a node.

A node is any computer that actively participates in a blockchain network, as the software for the respective blockchain is installed on it.

As the term forging was uncommon before the BMF letter in June 2022, the forging of token issuers was always referred to as staking. In view of the historical development of the terminology, experts could therefore also refer to forging as “active staking with its own node” or “active staking with a validator position” as opposed to “passive staking” without its own node or without its own validator position.

Staking itself refers to the holding and locking of coins in order to support the network and receive rewards for doing so. However, staking is also sometimes used where it is no longer about validations and blockchain extensions: so-called token staking, in which the locking away of tokens is also rewarded because this is considered useful for the network. Almost all ERC20 token staking models are token staking, as they do not have their own blockchain like coins.

Forging with a masternode

According to the BMF, the operation of masternodes is considered a special form of forging, although this can be discussed with regard to the tax consequences. A full node differs from a simple node in that it already stores the entire blockchain and not just parts of it. Like a full node, a masternode is a network server that stores a complete copy of the blockchain in real time in the original wallet and is connected to the network online around the clock, thereby increasing the stability of the network.

Minting

Minting describes the process of creating new cryptocurrencies or tokens. There are various forms of minting, which can of course lead to confusion with other terms:

  • Minting in PoS networks: Here, minting is done through forging, where new coins are generated as rewards for validating transactions and creating new blocks.
  • NFT minting: When minting NFTs, a digital asset is converted into a unique token and published on the blockchain. This can be done on platforms such as Ethereum, Binance Smart Chain or Solana.
  • Proof-of-Authority (PoA) networks: In PoA networks, the validation of transactions and the creation of new blocks is performed by a limited number of authorized validators and rewarded with the minting of new coins.
  • Proof-of-Burn (PoB) networks: In PoB, participants burn coins to obtain the right to create new blocks. Here, too, the new blocks are used to create newly minted coins.
  • Proof-of-Capacity (PoC) networks: PoC uses the available storage space on the participants' hard disks to create new blocks. The new coins issued as rewards are also mined.
  • Initial Coin Offering (ICO): During an ICO, new tokens are created and sold to investors to raise capital for the project. The creation of the genesis block during an ICO is a special form of minting.
  • Initial DEX Offering (IDO): New tokens are minted on a decentralized exchange (DEX) and made immediately tradable.
  • Initial Exchange Offering (IEO): Token distribution takes place via a centralized cryptocurrency exchange, which handles the sale and distribution of the newly minted tokens.
  • Meme coins: New tokens are also minted and put into circulation when meme coins are created.

Income from minting

The income from these processes varies. In mining and forging, participants receive new coins and transaction fees. In staking, users generate rewards by holding and locking coins. Minting NFTs enables artists and creators to sell their digital works and generate revenue. Minting as part of token offering events (ICO, IDO, IEO, meme coins) is often used for corporate financing.

Minting often also incurs costs, e.g. gas fees must be paid to the Ethereum network for the initial creation of ERC20 tokens. In rare cases, a loan is even issued during minting, which has to be repaid, which would then be a tax-neutral process from a tax perspective (e.g. SNX - Syntetics with sUSD as a mined loan).

Tax consequences of minting and co. in Germany

Although the letter of the German Federal Ministry of Finance (BMF) from 2022 has provided clarity on the tax treatment of cryptocurrencies in many areas, there are still uncertainties. While mining and forging are regularly regarded as commercial income, (passive) staking is usually taxed as other income at the individual marginal tax rate. In our opinion, token staking is likely to be income from capital assets (= withholding tax). The many minting events can often also constitute commercial income, but this must always be examined on a case-by-case basis.

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