Attention Tax Trap: Expensive Staking and Lending!

Staking and lending are two terms from the crypto world that every buyer of Bitcoin (BTC), Ethereum (ETH) or Ripple (XRP) should know. Because on the one hand, it can be used to increase the return. On the other hand, there is also the threat of high tax payments. However, little is known about how investors have to pay taxes on the profits from staking and lending. We clarify and give investors tax tips for trading with cryptocurrencies.

Longer speculation period for Lending

With a few exceptions, cryptocurrencies are not yet official means of payment like the US dollar or the euro. However, they can still be lent out. The technical term for this is “lending”. It comes from the English: to lend = to lend. And just as you get interest when you lend money, you also get a return when you lend.

Lending: The personal tax rate applies

The return comes, for example, from the fact that those who borrow cryptocurrencies trade them. Or they speculate on the fall of a currency. Or buy options with the borrowed cryptos – similar to trading stocks. The difference: “Because cryptocurrencies are not a means of payment in Germany, lending is a loan in kind,” explains Matthias Steger. He is a tax consultant in Potsdam and trains his colleagues and investors as a lecturer on the topic of “taxes and cryptocurrencies.” The return of the lender is therefore attributed to the so-called other income. There is no final withholding tax on this, but the sometimes significantly higher personal tax rate. In addition, “Because you earn income with the lent coins, the speculation period increases to ten years,” says the crypto expert. Accordingly, the return is only tax-free after ten years. Anyone who sells earlier will have to pay taxes on it. Without Lending, the speculation period is only one year.

Tip of the crypto tax advisor

Exchange cryptocurrency into stablecoins (English: stable = stable, coin = coin). Their price is tied to the value of the US dollar or the euro through special mechanisms. “As a result, there are fewer fluctuations in value. They are so small that it is lucrative to take lending profits – although the speculation period also increases here to ten years,” says tax expert Matthias Steger.

Possible exceptions for lending

However, there could be at least one exception for lending. It concerns bitcoin. This is because it has been an official means of payment in El Salvador since 2021. Therefore, a speculation period of one year would have to apply to Bitcoin, even if it was lent for the first time in 2021. In addition, 25 percent final withholding tax would then apply to the return on the sale, not the personal tax rate. “However, there is no official statement on this so far,” says Steger. Possibly, this regulation also already applies to 2020 and also to Ethereum. Because the canton of Zug in Switzerland accepts both currencies as a means of payment for taxes and fees since 2020.

Models in the issuance of new coins

• BTC mining: new coins by mining. They dilute the value of all previous coins. Rule says miner gets the total block reward.
• DASH Mining: New coins per mining. Rule says: 45% of Block Reward goes to miner, 45% to masternodes, 10% is set aside.
• XRP: All coins have already been created in one process. They are sold piece by piece.
• Staking: new coins are distributed according to the staking consensus.

Staking: Taxable – or not

The situation is even more complicated with staking. Like mining, this process describes the creation of new coins. Staking is therefore an alternative to mining and is said to consume less energy. Thus, staking is considered the more sustainable option. Those who are active as stakers receive something in return, called a block reward.

Steger compares the coin creation options to a stock split: more coins come onto the market, thus the value of the individual coins decreases. “Staking is therefore a kind of dilution,” says the crypto expert. Opinions differ on the tax assessment of this process:

• For the tax authorities, staking is taxable income from today’s perspective due to the consideration. As a result, the speculation period for one’s own coins is extended to ten years. The return achieved is therefore only tax-free if one holds the Coins for at least ten years. If you sell before then, you will pay taxes on the return. In addition, the Coins are considered “other assets”. Thus, the tax is not 25 percent final withholding tax as it is for stocks or bonds. Instead, taxes amounting to the often higher personal tax rate are incurred when they are sold.
• The crypto industry sees it differently: “Ultimately, it’s just a process according to set rules,” says Matthias Steger. “It’s about issuing new coins, where there are different models. Even if someone wanted to do without the Block Reward, that wouldn’t work. The rule stipulates that he gets something in return.” The issuance of these new coins is precisely equivalent to dilution. Accordingly, no extended speculation period applies.

Those who have a wallet should take a look at the settings. Those who do not want staking may be able to switch it off there

Matthias Steger, crypto tax expert and graduate in business administration in Potsdam

Staking affects many crypto investors

Those who think the question of the right definition is unnecessary should know: More cryptocurrency owners are affected than many think. “The problem is that many have basically come to staking by accident,” Steger says. This is because there are some coins, such as Cardano (ADA) and wallets, that automatically provide for the owner to participate in staking. However, this does not apply to BTC or ETH.

Tip from the crypto tax advisor

“Anyone who has a wallet should take a look at the settings,” says Matthias Steger. “Those who do not want staking can switch it off there under certain circumstances”. However, this is not always possible: “The NEO Wallet, for example, is always connected to Staking,” says Steger. Some wallets also offer a Pro version with Staking and a free offering with limited features and no Staking.

Ethereum: High taxes loom in case of staking

The discussion will become even more significant if Ethereum relies on staking instead of mining from 2022. After all, Ethereum is the second largest cryptocurrency by market capitalization after Bitcoin. The change may mean that everyone who owns ETH coins will suddenly have to deal with the issue. If they all automatically become stakers, it means that their coins will have a speculation period of ten years instead of one overnight. In the event of an early sale, taxes will then be due in the amount of the personal tax rate – which can sometimes be 35 percent.

Tip of the crypto tax advisor

“Sell in good time all Ethereum coins that they have held for at least one year,” says crypto tax expert Matthias Steger. “Because as soon as the coins go into staking, the ten-year deadline will apply to them. From that point on, their sale will no longer be tax-free after one year, as before, but only after ten years.” So Ethereum owners may save big taxes. One buys the coins anew afterwards. The speculation period of ten years then applies to them

A tax example on Ethereum and Staking

For example, if you bought Ethereum in March 2019, you paid around 140 euros per share. In October 2021, the price is around 4100 euros. This return is tax-free if sold after a holding period of at least one year. After the switch to staking, its sale within ten years could be subject to the personal tax rate. So at 35 percent or more, for example, that would be at least 14,350 euros in taxes.

What the FDP has to do with it

The FDP had spoken out in favor of the further development of cryptocurrencies in the 2021 Bundestag election campaign. The new Finance Minister Christian Lindner will have to be measured against these statements. In this respect, cryptocurrency holders in Germany may be curious to see how the currently still uncertain situation will develop.

If it remains the case that the tax authorities assess staking as income, but crypto investors see it differently, the courts may have to decide. To do so, a plaintiff would first have to be found. “The owners of cryptocurrencies are often secretive,” says Matthias Steger. “Many don’t want anyone to draw any conclusions about their assets. In a court case, however, many things would become public.” In addition, “the question is whether you would win as a plaintiff,” says Steger. Because otherwise such a process can be very expensive.

Tip from the crypto tax advisor

Owners of cryptocurrencies who are also active as stakers should watch their projects closely. “This applies especially to so-called liquidity mining on decentralized finances, i.e. DeFi,” says crypto expert Matthias Steger. “For this, you should use a tracking tool”. That’s because if exchanges go away, the processing of these processes can become very time-consuming. “With a tracking tool like Accointing, Cointracker or Koinly, you are on the safe side in case of inquiries from the financial authorities.”

Fine out with Bison or Bitcoin.de?

By the way, those who do not have their own wallet, but buy and sell cryptocurrencies via platforms such as Bison or Bitcoin.de, do not participate in staking. “This is still a safe haven,” says Matthias Steger. However, he points out, “For that, you also give up a nice, passive income. That’s true for lending, too.”

FAQ – Frequently Asked Questions