Could Germany Be Your Tax Haven? Enjoy Tax-Free Withdrawal of Crypto Assets

Among the most significant perks of German tax law for crypto investors is the tax exemption of profits from the sale of cryptocurrencies, provided they have been held for over a year. This is outlined in § 23 of the German Income Tax Act (Einkommensteuergesetz, EStG), meaning that proceeds from the sale of cryptocurrencies after the one-year holding period are not subject to income tax.

An Example:

• An investor purchases BTC in January 2023.
• The BTC is sold in February 2024.

Result: As the Bitcoin was held for over a year, the profits from this sale are completely tax-free.

If the investor had not adhered to the one-year holding period, the profit would be subject to standard German income tax. The personal income tax rate in Germany fluctuates between 14 and 47.475 percent.

To take advantage of the beneficial regulation of § 23 EStG, a foreign crypto investor must fulfil certain criteria.

The trading activities conducted by foreign crypto investors within the framework of private asset management must not assume a commercial nature. Only then can they claim the tax exemption of disposal gains. This requirement is generally met, as German tax law — unlike the law in some other countries — is liberal in this regard. A high volume of transactions and frequent trading do not automatically result in classification as commercial.

Typically, commercial trading activity is only assumed if the investor utilizes an extensive organizational infrastructure (e.g., office, employees) or if the trading is predominantly financed by external capital. Typical private investors do not operate in this way but conduct pure private asset management, so § 23 EStG applies.

At the point of selling his cryptocurrencies, the foreign investor must be subject to unlimited tax liability in Germany. This implies that he must either have a residence or his habitual abode in Germany. Only then can he sell his cryptos tax-free in Germany.

• Residence: A residence, in the tax sense, exists if the investor owns and uses an apartment in Germany. It is sufficient if the apartment is available to the investor at any time, even if he does not stay there permanently. Whether the investor buys or rents an apartment makes no difference. Even a small apartment is generally sufficient.
   
• Habitual abode: The habitual abode is assumed if the investor stays in Germany for more than six months. To play it safe, we generally recommend a longer stay of over a year.

The unlimited tax liability extends to the global income of the taxpayer, i.e., all income earned worldwide. This point is particularly crucial if the investor, in addition to his crypto income, has other substantial income from other sources domestically or abroad. In such cases, special planning is required to ensure that the tax exemption of crypto gains is not inadvertently offset by other taxes.

To benefit from the tax exemption of disposal gains under § 23 EStG, the investor must also have relinquished unlimited tax liability in his home country and be considered a tax resident in Germany according to the rules of a potentially applicable double taxation agreement (DTA) between the home country and Germany. Only then can the taxpayer rely on § 23 EStG, and the (potentially disadvantageous) foreign tax law of the home state does not apply to the crypto disposals.

For investors who are subject to unlimited tax liability in both Germany and their home country (e.g., in the USA due to their U.S. citizenship or in another country due to a local residence), the so-called Tie-Breaker Rule of the respective DTA usually applies. This Tie-Breaker Rule serves to clearly assign residency to one state to avoid double taxation. The following steps should be observed when applying the Tie-Breaker Rule:

1. The first criterion is the permanent home. A person is considered a resident in the state where they have a permanent home. A permanent home is a place of residence that is permanently available and not just temporarily.
    
2. If a person has a permanent home in both states, for example, because the investor also has an apartment in his home country, the Tie-Breaker Rule focuses on the center of vital interests. This includes the person's personal and economic relationships. Therefore, the investor is resident in the state with which he has the closer personal and economic connections. Factors such as the location of the family, workplace, social ties, and economic activities are considered here.
    
3. If the centre of vital interests cannot be clearly determined, the habitual abode is used. The habitual abode is the state where the person mainly stays. This is usually determined by the number of days the person spends in each state.
    
4. If the habitual abode cannot be clearly assigned either, the nationality of the person is used. The person is considered resident in the state of which they are a national.

Generally, the investor who wants to cash out tax-free in Germany must ensure that he has indeed relocated his center of life to Germany. This requires a clear plan and consistent and careful implementation.

Some double taxation agreements contain subject-to-tax clauses. These are regulations whereby the taxing right falls back to a state if the other state, although it has been assigned the taxing right, does not use it.

Additionally, the national law of the investor's home country is also important. There are cases where national law overrides the favorable regulations of a double taxation agreement and does not accept a tax-free disposal in Germany. In such cases, the home country retains the taxing right.

These pitfalls must be recognized and avoided before moving to Germany.

To benefit from the tax exemption under § 23 EStG and to prove to his bank that he acquired his crypto assets legally, the investor must meticulously document his crypto transactions. This includes:

• Dates of acquisition and sale: The dates when the cryptocurrencies were acquired and sold.
   
• Purchase and sale prices: The market value of the cryptocurrencies at the time of acquisition and sale.
   
• Holding period: Proof that the cryptocurrencies were held for a minimum of one year to ensure tax exemption.

We usually use third-party software tools for this documentation, typically CoinTracking. These evaluations are sufficient for tax purposes. For the creation of source of funds/wealth reports for your bank, they form at least an important basis.

In addition to documenting the crypto transactions themselves, it is also necessary to document the duration and intensity of the stay in Germany. Only then can it be proven to the tax authorities (possibly years later) that the investor actually established unlimited tax liability and DTA residency in Germany and therefore rightly benefited from the advantages of § 23 EStG.