Token Staking in Germany | Taxes & Profits
The staking of cryptocurrencies, particularly coins and tokens, has seen a significant rise in recent years. The staking of coins is a well-established practice, with a clear tax-related perspective from the authorities. However, the staking of tokens in Germany poses unique tax law queries that, to our knowledge, have not yet been addressed by the tax authorities.
We aim to briefly clarify why it’s crucial, from a tax standpoint, to differentiate between token staking and coin staking.
Coin staking from the BMF’s perspective
In its letter dated May 10, 2022, the German Federal Ministry of Finance (BMF) posits that income derived from staking coins, or participating in a staking pool where one contributes their stake for block creation without being a “forger,” should be classified as income from other services as per Section 22 no. 3 EStG, if it doesn’t fall under any other income category, such as commercial income.
Note: When the BMF discusses staking, it specifically refers to the staking of coins. This “actual” staking is the subject of the BMF letter.
What is the difference between a coin and a token?
Coins are digital currencies that operate on their own blockchain and primarily function as a means of payment. Bitcoin, Ether, and Litecoin are examples. Coin staking is closely tied to the proof-of-stake mechanism, where participants in blockchain networks contribute to network security by holding coins and receive rewards in return.
Conversely, tokens represent digital units that operate on an existing blockchain and can serve various functions, such as representing assets, voting rights, or access to specific services. Tokens don’t need their own blockchain to function and are thus more versatile than coins. To a certain extent, they utilize a third-party blockchain. ERC-20 tokens, which operate on the Ethereum blockchain, are a prominent example of tokens. The two DeFi tokens Chainlink and Aave, for instance, are tied to Ethereum.
Why the term token staking can be misleading
Coin staking relies on the proof-of-stake mechanism, where participants contribute to the network’s security and functionality by holding coins. Token staking, however, is neither directly nor indirectly connected to the block validation of blockchains.
Tokens that operate on an existing blockchain do not have their own blockchain. Consequently, there is neither a need nor a possibility for staking in terms of network security or block validation. Token staking isn’t aimed at advancing the blockchain or adding blocks to the blockchain. Rather, token staking primarily creates incentives for investors to lock their tokens and refrain from using them for a certain period, especially from selling them, to artificially reduce the number of tokens in circulation and thereby stabilize the tokens’ market value.
Tax implications of income from token staking in Germany
Given that token staking fundamentally differs from coin staking, we believe that the BMF’s remarks on coin staking do not apply to token staking.
This implies that there isn’t a definitive statement from the tax authorities on token staking. This is significant because the tax authorities are bound by the BMF’s letters. However, if the BMF doesn’t address this in its letter dated May 10, 2022, the respective tax office can make its own judgement without contradicting the BMF letter.
It could, for instance, also identify income from staking rewards as capital income, subject only to a withholding tax of approximately 25 percent, rather than the personal income tax rate (up to 45 percent).
Token staking should be evaluated individually for tax purposes
The tax implications of staking activities in Germany necessitate a nuanced approach, particularly in distinguishing between coins and tokens. While the staking of coins has been addressed in the BMF circular, the staking of tokens necessitates an individual tax assessment that considers the specific functions and potential uses of tokens. Hence, it is impossible to universally declare that token staking, for instance, is always taxed at the individual income tax rate or is invariably tax-free.
WINHELLER provides advice on the taxation of token staking
Do you have queries about staking coins or tokens? Do you prefer your staking rewards to be subjected to a flat withholding tax rather than your personal income tax rate? Our experienced advisors for the taxation of crypto assets are ready to assist you! We will review your staking commitment and are willing to manage all communication with the tax office. We are eager to assist you with your crypto tax return or file an appeal against an already issued tax assessment notice. Feel free to reach out to us with your questions!
Your (tax) advisors for token staking in Germany
Do not hesitate to get in touch with us. You can contact us by phone (+49 69 76 75 77 85 28) or via our contact form for the taxation of crypto assets.
