Lending
Cryptocurrency lending can offer attractive interest rates, while cryptocurrency borrowing provides liquidity and access to capital.
Crypto lending and taxes - Lending crypto, understanding taxes
Lending - Overview
Crypto lending is a growing area in the cryptocurrency financial ecosystem that allows users to lend or borrow their cryptocurrencies. This is done via specialized platforms that connect lenders and borrowers. Cryptocurrency lending can offer attractive interest rates, while cryptocurrency borrowing provides liquidity and access to capital. Below you can find out more about what lending is, what different types there are and how it is treated for tax purposes in Germany.
What is lending?
Lending refers to the process by which cryptocurrency holders lend their digital assets to other users or platforms. In return, they receive interest on the funds lent. On the other hand, users who lend cryptocurrencies can use them for various purposes, whereby they also have to pay interest on the amount lent.
Objectives of Lending
Generate income
Crypto holders can generate passive income in the form of interest by lending their assets.
Liquidity
Borrowers can gain access to liquid funds without having to sell their cryptocurrencies.
Leveraging investments
Some investors use borrowed cryptocurrencies to invest in other digital assets and maximize potential profits.
Types of lending
Centralized lending platforms
Description:
These platforms act as intermediaries between lenders and borrowers and manage the entire process.
Advantages:
They are characterized by user-friendliness, uniform interest rates and professional risk management provided by the platform.
Disadvantages:
However, there is a centralized risk, as the platform could be hacked or go bankrupt.
Decentralized lending platforms (DeFi)
Description:
Decentralized platforms are based on smart contracts and enable lending and borrowing without central control.
Advantages:
They offer greater transparency, lower fees and increased security through decentralization.
Disadvantages:
However, they require a technical understanding and harbor risks due to possible smart contract bugs or hacks.
Peer-to-peer (P2P) lending
Description:
Direct credit agreements between lenders and borrowers take place without a central intermediary.
Advantages:
This method offers flexible conditions and interest rates as well as greater control over the terms of the loan.
Disadvantages:
However, there is a higher risk and possible difficulties in enforcing repayments.
Tax treatment of lending in Germany
The tax treatment of income from lending can be complex and depends on various factors. Here are some basic guidelines:
Income tax
- Taxation of interest income:
Interest income from the lending of cryptocurrencies is considered income from capital assets in Germany (Section 20 EStG) and is subject to income tax. - Withholding tax:
Interest income may be subject to withholding tax of 25% plus solidarity surcharge and, if applicable, church tax. - Allowances:
Lenders can use the saver's allowance, which is currently EUR 801 for singles and EUR 1,602 for married couples.
Trade tax
- Commercial activity:
If lending is operated on a commercial basis and on a large scale, the income could also be subject to trade tax.
Value added tax
- No VAT:
The lending of cryptocurrencies and the resulting interest income are generally not considered to be subject to VAT.
Documentation and obligation to provide evidence
In Germany, it is important to document all lending transactions and interest income precisely. The burden of proof lies with the taxpayer. It is advisable to record the following information:
- Date of award and repayment
- Interest received and its value at the time of receipt
- Transaction details and wallet addresses
- Contractual agreements and conditions
Summary
Crypto lending is an efficient way for crypto holders to generate passive income while giving borrowers access to liquid funds. There are various forms of lending, including centralized and decentralized platforms as well as peer-to-peer models. In Germany, interest income from lending is subject to income tax and must be carefully documented.
This information serves as a general guideline and cannot replace individual tax advice from our experts. The tax treatment may vary depending on your specific situation and the current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and comply with the legal requirements.