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Taxation of Airdrops in Germany

What is a crypto airdrop?

Basically, an airdrop is simply a matter of distributing certain tokens for free. A holder of a cryptocurrency receives further units of cryptocurrency without any action on their part. This means that they do not have to pay for the cryptocurrency received by airdrop.

One of the best known and at the same time allegedly one of the largest airdrop programs was the 2018 airdrop of the Stellar Lumen Token (XLM). There are numerous other examples. Airdrops are also common in the NFT environment.

Technical requirements for receiving airdrops

In order to receive airdrops, one needs a suitable wallet, which should be able to receive as many different cryptocurrencies as possible. Wallets that work on the basis of the Ethereum blockchain have proven to be particularly practical, because many airdrops are backed by ERC-20 tokens based on this blockchain. Thus, for example, a credit of cryptocurrencies can be issued to the wallet on which the beneficiary holds a certain amount of the cryptocurrency Ether (ETH).

It is also possible to get access to a new cryptocurrency by proving that you hold a certain amount of cryptocurrency (e.g. Bitcoin) on another blockchain. The cryptocurrencies issued by airdrop are either created directly in the wallet of the recipient or are transferred from a pool of the issuer to the recipient wallet.

Why are airdrops given away?

The reasons for giving away cryptocurrencies are numerous. Often it is a matter of drawing attention to a new cryptocurrency. For instance, many startups use airdrops to make their cryptocurrency more widely known. Crypto exchanges such as Binance also use airdrops to reward customers for their loyalty. This is more or less a bonus program.

Are airdrops legitimate?

The airdrops that a user receives on a wallet on which he holds a corresponding cryptocurrency (such as Ether) are safe. However, caution is advised if the user wants to participate in an airdrop and is asked to provide too much personal information. The user should never even share his private key!

Attention also before NFT airdrops, which the investor cannot allocate. Then these NFTs (e.g. on the marketplace Opensea) should not be clicked. In many cases, malware is hiding behind these airdrops, which in the worst case can cause the user's NFT wallet to be emptied.

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Are airdrops taxable in Germany?

In the context of an airdrop, the user receives cryptocurrencies without having rendered a service in return. In the opinion of the German tax authorities, such an inflow is tax-free for the investor. The situation is different if the investor has provided a return service in connection with the receipt of the airdrop (so-called exchange of services). The Federal Ministry of Finance recognizes in such an inflow by exchange of services a taxation according to § 22 No. 3 of the German Income Tax Act (Einkommensteuergesetz, EStG). It is sufficient for this if, for example, the user had to disclose personal data in advance. As a result, however, taxation is likely to be avoided in this case as well, since airdrops generally do not have a tax-relevant market value at the time of receipt. In these cases, the value of the coins received is set at EUR 0.

How are airdrops taxed in Germany?

The German Federal Ministry of Finance (BMF) considers the inflow of an airdrop for which the investor has paid a consideration to be an acquisition, even if the inflowing coin has an inflow value of EUR 0. This leads to the start of the one-year holding period with regard to a subsequent sale of the coins. In the case of a sale within the holding period, a possible gain would therefore be taxable at the personal income tax rate.

Whether this view of the BMF is correct in each individual case may be doubted. This is because, depending on the design of the airdrop, the cryptocurrencies are not transferred from the legal sphere of a third party to the user at all. Rather, they often begin their "existence" in the user's assets in the first place. The cryptocurrency is thus created directly in the user's wallets, whereby the wallets must meet certain criteria. In this respect, such airdrops resemble a lottery win or a chance find (so-called windfall profits). In any case, an acquisition from a third party is not recognizable in these cases. This in turn means that a later sale cannot be subject to taxation under Section 23 EStG.

Incidentally, if the investor wants to sell coins from an aidrop that has accrued to him from an issuer and for which he has not provided any return service, a special case applies: the acquisition date of the predecessor in title must be attributed to the investor in accordance with Section 23 (1) Sentence 3 EStG, i.e. it would be necessary to find out when the issuer of the aidrop had acquired it himself. This could at least shorten the holding period still to be observed by the investor. However, it will often not be possible to determine this. If you want to be on the safe side, you should therefore still observe the holding period of one year from the inflow of the airdrop.

Is an airdrop a taxable gift?

If an investor receives an airdrop without having to pay anything in return, this may constitute a gift tax transaction. This applies at least to aidrops that flow out of the wallet of the issuer/donor and flow to the investor in his wallet.

In the case of coins that only begin their existence in the investor's wallet, on the other hand, there is already no outflow from the donor's assets. Thus, there cannot be a taxable gift in these cases.

But even if a taxable gift can be considered, the applicable tax-free amount of EUR 20,000 must be taken into account. The inflow of aidrops from the same publisher within a 10-year period is tax-free up to EUR 20,000. And only rarely will an aidrop be worth more than EUR 20,000.

Our consulting services regarding airdrop tax

Regarding airdrop taxation in Germany, we support you with

  • the legal assessment of whether your airdrops are to be considered as a tax-free inflow or as a gift
  • the representation of the tax assessment vis-à-vis the tax authorities in case of dispute, and
  • the preparation of your German tax returns and management of your crypto portfolios (in cooperation with CoinTracking).

Your attorney for the taxation of airdrops in Germany

Are you looking for advice on airdrop taxation in Germany? Our experienced tax experts for cryptocurrencies

will gladly support you in this. The easiest way to reach us is by e-mail (info@winheller.com), by phone (+49 69 76 75 77 80) or via our contact form for the taxation of cryptocurrencies. Feel free to contact us with your inquiries on airdrop tax!

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