Bitcoin Trading in Germany:
6 Things You Must Know
Taxes, trading, regulation and product availability
According to a Yahoo! Finance study from September 2023, Germany is in the top 20 countries in terms of Bitcoin owners as a share of the population. The adoption rate is highest among the youngest generations of Germans— last year, the cryptocurrency exchange KuCoin reported that 28% of Gen-Z crypto users in the country utilize digital currencies for payments, while 51% of all crypto users are Millennials. Considering the rising popularity, especially with less experienced traders, it is essential to understand some key facts and specific requirements that are in place in Germany.
The content of this post does not constitute financial or investment advice. It is intended for information and education purposes only. The author is not affiliated with any financial or other institution that may be mentioned in the post.
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Why does Bitcoin attract investors in Germany?
Bitcoin (and crypto in general) trading is not like trading stocks or bonds. There are no cash flows or underlying financials that can be used to estimate a fair value. There is no transparency as to how many big players there are in the market and how much they are influencing the price at any given time. There is no guarantee that the main use case proposition of Bitcoin as a decentralized medium of exchange, independent of the existing fiat financial system will ever be fully realized. And yet, sentiment often swings sharply up or down, producing significant jumps and drops in the price (measured in fiat currencies) — a volatility property that traders and speculators are attracted to as it offers the possibility for enormous gains (as well as huge losses).
In Germany, Bitcoin has been given legal status as a financial instrument within the banking regulations (similar to “private money” that can be used in “multilateral clearing circles”, not as e-money or a foreign currency) and as a “unit of account” — which means that it could potentially be used for tax and trade purposes in the country. The German Bundesbank sees the Bitcoin system as “a small, largely isolated niche”, punctuated by scandals and potential risks. But from an individual’s perspective, the trends are clear (e.g., refer to this Triple-A report):
– Ownership of crypto (especially Bitcoin) in portfolios of German residents is on the rise, with younger and high-income-earning individuals in particular. Overall adoption has doubled since 2021.
– Attitudes of individual investors are highly optimistic, as an overwhelming majority (over 90%) of respondents have plans to either increase their holdings or keep them unchanged. And according to Gemini’s 2022 Global State of Crypto report, 53% of Germans admit to being “crypto curious”.
– The number of Germans who would like to use crypto for purchases has gone up from around 1 million in 2021 to nearly 1.7 million in 2022. 72% of German digital currency spenders are spending more than €100 of crypto for purchases monthly, with a sizeable crowd (35%) being large spenders of more than €1,000 monthly. E-commerce is the most popular use case.
– Bitcoin is by far the most popular choice for those with crypto portfolios, with about 70% of them reporting holding the biggest cryptocurrency.
Given these data, which outline quite a positive outlook for Bitcoin portfolio allocation in Germany, let us look at some key aspects relevant to it in the country.
1. Crypto regulation
Over the years, Germany has enacted national regulations on cryptocurrencies, exchanges and related services. In addition to that, the country has participated in the development of EU-level requirements which it has implemented, as well as international regulatory frameworks, such as the standard for banks’ exposures to the cryptosystem by the Basel Committee for Banking Supervision (BCBS). German regulators have repeatedly expressed the willingness to enable the system to develop (instead of banning Bitcoin as some other countries have done) so that beneficial innovations can take place, while “regulating and containing it” — i.e., preventing significant risks and contagion into the traditional financial system.
The global regulatory framework is evolving very dynamically and while it currently provides guard rails for crypto markets and services, the crypto ecosystem is constantly and rapidly changing. The risks that the existing regulatory regime aims to address, include, among others:
1. the high concentration of the crypto market (i.e., in terms of assets — Bitcoin and Ethereum represent about 70% of market cap; in terms of the small number of exchanges where trading takes place, the small number of large holders, etc.);
2. contagion risks in the event of a run on a crypto asset, caused by the reserves of traditional assets backing it and the links to the traditional financial system, which could lead to systemic events;
3. monetary instability in regions with underdeveloped financial infrastructure due to currency substitution;
4. investment risks caused by significant volatility combined with highly leveraged deal structures that are complex and opaque;
5. preventing crypto scams.
An overview of the key regulations applicable in Germany is provided below. This list only outlines the main ones, and new ones are in development.
Overall, it is important to keep in mind that, based on the regulations listed, the following applies to Bitcoin and crypto assets in Germany:
– they are legal, treated and traded as financial instruments, but they are not considered currency or legal tender;
– regulations applicable to investments and securities apply, where relevant, similarly to crypto assets;
– all cryptocurrency exchanges operating in Germany are required to obtain a license from the from the Federal Financial Supervisory Authority (BaFin);
– similarly, crypto custodians in Germany are required to obtain special authorization from the BaFin, ensure compliance with Anti-Money Laundering (AML) regulations, and hold a certain minimum required amount of own funds (capital);
– crypto exchanges and service providers need to have strict AML and KYC (know-your-client) procedures and transaction monitoring, as well as reporting of suspicious activity;
– buying and selling of crypto assets in Germany can take place either on crypto exchanges or peer-to-peer trading platforms.
2. Taxes
For tax purposes, the policymakers in Germany did not consider Bitcoin and crypto as capital investments or currencies, but rather — as private assets (or other personal economic assets). This is a similar treatment to gold, for example. This means that what applies to Bitcoin/crypto is not the so-called Capital Gains Withholding Tax (Abgeltungsteuer), but the more general Individual Income Tax (Einkommensteuer).
Based on the above summary of how crypto is taxed in Germany, one can see that:
– it pays off to hold BTC and other cryptos for longer than a year as this makes any sales, swaps or purchases with them tax-free;
– BTC/cryptos are not treated like financial instruments (which is what regulators do), which brings benefits for individual investors holding them, such as the absence of the Vorabpauschale (advance flat tax on unrealized capital gains) or exemption from the flat 25% tax rate (the rate can be effectively much lower and depends on the income tax bracket);
– there are a number of additional provisions and special rules, that allow for reduction of the tax burden, such as tax loss harvesting, recognition of mining costs and blockchain or exchange fees as deductions, potential allowance for lost/stolen crypto or losses due to bankrupt exchanges, as well as spousal transfers.
3. Crypto exchanges
There are multiple crypto exchanges authorized to operate in Germany, such as Bitpanda, Coinbase, Nexo, Bitcoin.DE, BISON, Bitstamp, etc. (This is not a recommendation of any individual exchange). Normally, they are required to either receive a license from the BaFin and be regulated by it, or have a properly structured cooperation with a banking partner under whose liability umbrella they can function as a so-called “contractually bound intermediary”. The latter setup is subject to strict legal requirements, the contracts are generally very complex and the arrangement is usually subject to residual risk for the parties involved.
If you are just starting with BTC/crypto trading in Germany, there are several aspects to consider as criteria for picking the right exchange:
– Available cryptos — various exchanges offer different numbers and types of cryptos, although BTC is basically available universally. Make sure the one you want to trade is part of that list.
– Payments and withdrawals — exchanges may limit the number of payment methods and the options for withdrawals, as well as the fiat currencies with which it works. Be sure to understand what is possible and what kinds of restrictions are in place, otherwise, you may have difficulties depositing more funds when you need them or cashing out when you decide to.
– KYC process — it is a requirement, so any exchange in Germany would normally put you through this process. Make sure you are able to supply the necessary information and documents, as needed. Some exchanges may have more streamlined and automated steps compared to others, making it much easier and faster on customers to register, fund their accounts and start trading.
– Trading costs — fees and spreads apply to crypto transactions. But they can vary enormously in magnitude, what they apply to, and how they are calculated (sometimes the fees are part of the spread, which can widen significantly in times of increased volatility or market stress). Make sure you understand how each exchange charges you — and whether that cost model works for you.
– Customer service — some exchanges fall short in that department, and public reviews and complaints, as well as social media feedback, could shed light on possible issues and a company’s response and policy when it comes to such situations.
– Audits and compliance — in some cases, there is public scrutiny and publication of audit results or compliance issues that could give a hint as to whether a certain exchange is legitimate and operates according to all standards or requirements, or whether there might be concerns about safety or criminal activities.
– Order types — some exchanges and trading platforms could offer only certain types of orders, such as quote requests (where the price is shown only after the quantity bought or sold is requested) or market orders (where execution is immediate at the current market price). Others also allow limit orders (i.e., a trade is executed only after a certain minimum or maximum price is reached, but not before).
– Advanced functionalities — trading of crypto derivatives, advanced analysis tools, copy trading features, etc., might not be available at all exchanges. Make sure you research where these are offered if you need them and with what conditions.
– Wallet availability — not all exchanges offer that, which could be a significant limitation when the intention is to hold and protect holdings outside of a trading account.
– Additional earnings — profiting from staking, affiliation, crypto lending, etc., are special services that could increase your earning potential but are usually only available at a limited number of exchanges.
4. Brokerage services and physical withdrawals
Online brokers and various traditional banks offer the possibility to trade BTC and crypto in Germany. The process works generally as follows: a German resident opens a securities account (providing proof of residence or ID, as well as relevant tax information), and the broker or bank processes purchases and sales via a market-maker that procures the crypto assets for the investors. Any cryptos purchased are stored by a crypto custodian in a so-called collective wallet — particularly for cost reasons. If holdings within that collective wallet change significantly, then the position of the wallet must be rebalanced via other trading venues. At any point in time, there must be assignments within the collective wallet, making it clear what and how many cryptos belong to which individual client.
The brokers and banks that offer crypto trading in Germany are subject to BaFin supervision. Using such accounts generally allows trading cryptos alongside traditional asset classes (individual stocks, bonds, equity ETFs, commodities, etc.), which can make managing a full portfolio much more convenient, especially for beginners. This was not possible in Germany until 2020 but is now offered much more commonly. Some brokers and banks (as well as exchanges) now have also started offering savings plans (Krypto-Sparplan or Bitcoin-Sparplan) to their clients, which are set up to invest regularly and automatically customer funds, similarly to setting up a standing order for trade execution on specific dates. Most of them can be set up with a daily, weekly or monthly frequency, depending on individual preferences, goals and tolerances.
Keep in mind that due to certain overlaps in services, the same criteria mentioned above for selecting an exchange can be used as factors to research and choose brokers and banks.
Physical withdrawals (i.e., via Bitcoin-to-fiat conversions) are still relatively new and available only in very limited locations in Germany (188 as of March 2024). In Europe as a whole, there are about a couple thousand crypto ATMs, vs. around 31,000 in the USA. The costs of physical crypto ATMs in Germany are still substantially higher due to operating and maintenance costs. In order to establish an ATM, the BaFin requires a special permit that is given only if the operator has a license for proprietary trading according to the German Banking Act (KWG) or in direct cooperation with the Financial Commission. To use an ATM, customers generally must register online and download a wallet app to their smartphone. Below is an overview of the locations in Germany and the number of ATMs at the time of writing (refer to coinatmradar.com).
The BaFin has issued warnings against trusting online with dubious web addresses and unknown platforms, pretending to be renowned international crypto brokers. If they do not have the necessary licensing from the supervisory authority, they should not be trusted. Offers from social media accounts, such as free distributions or exchanges of the kind of “send–one-get-many” which are obvious scams, should also not be trusted, as well as aggressive marketing schemes by “FinFluencers”. Some red flags that the regulator highlighted:
– No imprint (Impressum) or other registration information about the broker or the exchange, no presence of the company on the BaFin corporate database (available online).
– The service provider exerts time pressure and triggers a “fear of missing out — FOMO”.
– Social media accounts with lots of followers, likes or positive comments, could be completely fraudulent — such numbers do not guarantee anything about the seriousness or quality of an influencer, firm or their recommendations. If an offer seems too good to be true relative to the risks involved (e.g., a free lunch, a riskless profit), it probably is.
– Incentives and affiliations: the financial motives of a tipster or “Finfluencer” are often financed by referral commissions. They are paid to convince people to trade, irrespective of whether a recommendation is reasonable and presents a good opportunity.
– Supposed successes on demo accounts are often not real and presented in an exaggerated way to deceive someone into making an investment.
5. Wallets
Crypto wallets enable crypto users to take custody of their BTC or other crypto holding in their own hands and not to rely on an intermediary. Unlike a conventional current account where you hold fiat currency, a crypto wallet can be held on a physical device and can hold multiple cryptocurrencies.
The wallets are protected with public-private encryption and crypto owners must know the private key of their wallet to have access to crypto assets. However, if a private key is lost, it cannot be restored and access to holdings on that wallet is also lost.
The Markets in Crypto Assets Regulation (MiCAR) establishes specific rules and licensing requirements for custodial wallet providers — and crypto wallets fall under the purview of the BaFin as a primary regulator.
Wallets available in Germany can be split into two groups:
– Hot Wallets — the ones provided by trading venues (exchanges, brokers, custodian companies, platforms, etc.) or software (desktop) and browser wallets, including mobile ones (e.g., smartphone apps). They are convenient for quick trading of various tokens but are a lot more susceptible to hacker attacks or fraud.
– Cold Wallets — these include hardware wallets (e.g., special USB sticks or crypto devices) or physical wallets with code on paper (a generator creates the wallet and the seed phrase or private key only exists on paper or in an offline document). Security is higher as hacking is generally very difficult, but the risk of physical loss is higher. Providers such as Ledger or Trezor operate and offer cold wallets in Germany (not a recommendation) but they cost money, entry-level sticks could go as low as €50 but cheaper ones could usually be risky as they could be infected with malware.
There are no limitations in Germany as to how many wallets one can own, and it could be sensible to have more than one if one has significant holdings and wants to spread the risk.
6. Exchange-traded products
The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive in the European Union states that ETFs can only be authorized in the EU if there is a minimum level of diversification. This is the reason spot Bitcoin ETFs are not legally allowed in the EU, even though they have been approved for trading in the USA. In Germany, the Capital Investment Companies Act (Kapitalanlagegesellschaftsgesetz) requires, among other things, diversification of risk across many securities, meaning that one security (e.g., Bitcoin alone or Ethereum alone) may not account for more than 10% of the fund assets in an ETF.
However, due to this fact, in most European countries, including Germany, Bitcoin-based and Ethereum-based exchange-traded products are available as Exchange-Traded Notes (ETNs) (or also as Exchange-Traded Products ETPs or Exchange-Traded Commodities ETCs). ETNs are bonds whose performance is linked to the performance of the underlying asset (in this case, crypto asset). The issuer of the bond is not the ETN provider, but a specially founded special purpose entity (SPE) that is also entered in the blockchain as the owner when the Bitcoin is purchased. Legally speaking, an ETN is not a fund that is subject to the strict requirements for investment companies, but rather a bond, which means there is a risk that the ETN could become part of the bankruptcy estate if the provider goes bankrupt and the customer’s money is at risk. To ensure that providers do not fail in the event of market turbulence and that customers’ money is protected as well as possible, Bitcoin is normally deposited as collateral for a Bitcoin-ETN.
Some brokers and banks also offer savings plans with Crypto-ETNs, which could be useful for long-term investing and can provide an automated way to average across varying entry prices over time. However, they usually come with both institutional fees and additional charges on top (such as management and administration costs), which is why their total expense ratios (TERs) can be quite high (e.g., 40–180bp or more higher than equity ETFs on popular indices). They can also have higher bid-ask spreads and they are not part of the tax-free provision for holding them over 1 year. Very importantly as well, they are not traded 24/7 like BTC, as trading is only limited to the official exchange trading hours.
Conclusion
Bitcoin/crypto trading is not for everyone and generally requires a higher level of risk tolerance and works better over longer time horizons. But Germany is a crypto-friendly country overall, despite the strict regulatory regime. There are licensing and reporting requirements in place to help prevent money laundering, fraud and scams, which help protect crypto traders. And there is a relatively favorable tax treatment for crypto assets due to their classification for tax purposes and application of the income tax and special provisions. ETFs are not allowed (yet), but other exchange-traded products are for those interested. This is expected to change, as well as the regulations, over the next decade, as authorities (central banks, regulatory bodies, supervisors) evolve their views on the path of financial innovation, investor protection and central bank digital currencies emerge. Therefore, the crypto space will likely be particularly exciting in the coming years.
Author: Nikolay
Founder of MoneyCraft
