Lending
Lending cryptocurrencies can offer attractive interest rates, while borrowing cryptocurrencies provides liquidity and access to capital.
Crypto lending and taxes - Lending crypto, understanding taxes
Lending - Overview
Crypto lending is a growing area within the cryptocurrency financial ecosystem, allowing users to lend or borrow their cryptocurrencies. This is done through specialized platforms that connect lenders and borrowers. Lending cryptocurrencies can offer attractive interest rates, while borrowing them provides liquidity and access to capital. Below, you'll learn more about what lending is, the different types available, and how it's 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 lent funds. Conversely, users who borrow cryptocurrencies can use them for various purposes, also having to pay interest on the borrowed amount.
Goals 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 carry risks due to possible smart contract bugs or hacks.
Peer-to-peer (P2P) lending
Description:
Direct loan agreements between lenders and borrowers take place without a central intermediary.
Advantages:
This method offers flexible terms and interest rates, as well as greater control over the loan conditions.
Disadvantages:
However, there is a higher risk and potential difficulties in enforcing repayments.
Tax treatment of lending in Germany
The tax treatment of lending income can be complex and depends on various factors. Here are some basic guidelines:
Income tax
- Taxation of interest income:
Interest income from lending cryptocurrencies is considered income from capital assets in Germany (§ 20 EStG) and is subject to income tax. - Withholding tax:
Interest income may be subject to a withholding tax of 25% plus solidarity surcharge and, if applicable, church tax. - Tax allowances:
Lenders can use the savings allowance, which is currently 801 euros for singles and 1,602 euros for married couples.
trade tax
- Commercial activity:
If the lending is carried out on a commercial basis and on a larger scale, the income may also be subject to trade tax.
VAT
- No sales tax:
Lending cryptocurrencies and the resulting interest income are generally not considered subject to sales tax.
Documentation and proof requirements
In Germany, it is important to accurately document all lending transactions and interest income. The burden of proof lies with the taxpayer. It is recommended 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 borrowers gain 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 general guidance and cannot replace individual tax advice from our experts. Tax treatment may vary depending on your specific situation and current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and ensure compliance with legal requirements.