Germany DeFi Tax Guide 2025

Finanzamt Treatment of DeFi

German tax law treats DeFi transactions as private sales transactions with a unique complication:

• Cryptocurrency = private sales transaction (Privates Veräußerungsgeschäft)
• Normal holding period: 1 year to be tax-free
• EXTENDED holding period: 10 years if tokens generate income
• €600 annual exemption applies

The 10-Year Rule Explained

Legal Background

German Income Tax Act (§23 EStG) extends the holding period from 1 year to 10 years when crypto assets:

• Generate "income" or "benefits" (Einnahmen)
• This includes: yield farming rewards, liquidity mining, lending interest, staking rewards

What This Means for DeFi Users

If you use your tokens in DeFi protocols that generate rewards:

• The tokens must be held for 10 years (not 1 year) to be tax-free
• This applies to the entire token position, not just the portion earning rewards
• Even withdrawing from the protocol doesn't reset the clock

Example: 10-Year Rule Impact

• Jan 2024: Buy 10 ETH for €20,000
• Feb 2024: Deposit into Aave, earn lending interest
• Mar 2024: Withdraw from Aave
• Jan 2026 (2 years later): Sell 10 ETH for €50,000
• Taxable: €30,000 gain (because you used it to generate income, must hold 10 years!)
• Tax at marginal rate: €30,000 × 35% = €10,500

Same scenario without DeFi:

• Jan 2024: Buy 10 ETH for €20,000
• Jan 2026: Sell for €50,000 (held >1 year)
• Tax: €0 (tax-free after 1 year)

Yield Farming & Liquidity Mining

Tax Treatment of Rewards

Earning tokens = income from "other sources":

• Report on Anlage SO (sonstige Einkünfte)
• Taxed at personal income tax rate (14-45%)
• €256 annual allowance for "other income"
• Cost basis for future sale = value when received

⚠️ Critical: Triggering 10-Year Holding Period

When you deposit tokens into yield farming protocols:

• Those tokens now generate income
• Holding period extends to 10 years
• Applies even after you withdraw from protocol

Example: Yield Farming

• March 2024: Buy 100 UNI for €1,000
• April 2024: Stake UNI in liquidity mining, earn rewards
• June 2024: Claim 10 UNI rewards worth €120
• Income: €120 (report on Anlage SO)
• Cost basis for rewards: €120
• March 2035 (11 years later): Sell original 100 UNI for €3,000
• Tax: €0 (held >10 years)
• Gain: €3,000 - €1,000 = €2,000 (tax-free)

If sold before 10 years:

• March 2026 (2 years): Sell for €3,000
• Gain: €2,000
• Fully taxable (hasn't reached 10 years)
• Tax: €2,000 × marginal rate (e.g., 30% = €600)

Providing Liquidity

Adding Liquidity

Not taxable if you receive LP tokens:

• LP tokens = beneficial ownership
• No disposal of underlying tokens
• ⚠️ But triggers 10-year holding period if pool generates fees/rewards

Removing Liquidity

Taxable if token amounts differ:

• Calculate gain/loss on each token
• Remember: must hold 10 years for tax-free (because pool generated rewards)
• Under €600 total private sales: tax-free

Impermanent Loss

Not deductible until realized:

• While in pool: no tax impact
• When withdrawn: capital loss is realized
• Offset against capital gains

Example: Liquidity Pool (Under 10 Years)

• Deposit: 1 ETH (€2,000) + 2,000 USDC (€1,600)
• Receive: 100 LP tokens
• Tax: €0 (not a disposal)
• Pool earns trading fees (passive income)
• ⚠️ 10-year holding period now applies
• 2 years later, withdraw: 0.9 ETH (€2,700) + 2,100 USDC (€1,680)
• ETH gain: €2,700 - €2,000 = €700
• USDC gain: €1,680 - €1,600 = €80
• Total: €780
• Taxable: €780 (under 10 years, above €600 exemption)
• Tax: €780 × marginal rate

Lending & Borrowing

Lending Crypto

Interest = income from "other sources":

• Report on Anlage SO
• FMV of tokens = income
• €256 annual allowance applies
• ⚠️ Lent tokens now subject to 10-year holding period

Borrowing Crypto

Taking loan = not taxable:

• Loans aren't income
• Depositing collateral = not a disposal
• Interest paid = not deductible (unless business)
• ⚠️ Collateral subject to 10-year holding period

Example: Lending on Aave

• Lend 10,000 USDC (cost €10,000)
• Earn 5% APY = 500 USDC (€500)
• Income: €500 (minus €256 allowance = €244 taxable)
• ⚠️ Original 10,000 USDC now has 10-year holding period

Token Swaps

Every swap = private sales transaction:

• Disposing of token A = taxable if held <1 year (or <10 years if generated income)
• Acquiring token B = new cost basis
• €600 exemption applies to all private sales combined

Example: Uniswap Swap

• Buy 1 ETH for €2,000
• 8 months later, swap for 2,000 DAI when ETH = €3,000
• Gain: €1,000
• Taxable: €1,000 (held <1 year)
• DAI cost basis: €3,000

Wrapped Tokens

Conservative View (Likely Finanzamt Position)

Wrapping = private sales transaction:

• ETH → WETH = disposal + acquisition
• Usually no gain/loss if same value

Alternative View

Wrapping = not a transaction:

• No economic substance
• WETH is just ETH in different form
• Riskier without official guidance

Airdrops & Governance Tokens

Receiving tokens = income from "other sources":

• Income = FMV when received
• €256 annual allowance
• Cost basis = income value
• 1-year holding period starts (not 10-year, unless you use them for income)

Example: UNI Airdrop

• Receive 400 UNI worth €1,600
• Income: €1,600 (minus €256 = €1,344 taxable)
• Cost basis: €1,600
• Hold without using in DeFi for >1 year
• Sell for €2,400
• Tax: €0 (held >1 year, never used for income)

€600 Annual Exemption

Total gains from ALL private sales transactions:

• If total ≤€600: Tax-free
• If total >€600: Entire amount taxable (not just excess!)
• Includes: DeFi swaps, regular crypto sales, other assets

Example: €600 Exemption

• Swap 1: €200 gain
• Swap 2: €300 gain
• Swap 3: €150 gain
• Total: €650
• Taxable: €650 (entire amount, not just €50 excess)

Income Tax Rates

Plus solidarity surcharge (5.5% of tax) for higher incomes

How to Report

Tax Return (Steuererklärung)

1. DeFi Income: Anlage SO (sonstige Einkünfte) - "Other Income"
2. Private Sales: Anlage SO - "Privates Veräußerungsgeschäft"
3. List each transaction with dates, costs, proceeds
4. Apply €600 exemption across all private sales
5. Apply €256 allowance to other income

FIFO Method

Germany uses FIFO (First In, First Out):

• First tokens purchased = first tokens sold
• Important for tracking holding periods

Record Keeping

Keep records for at least 6 years:

• Transaction hashes
• Wallet addresses
• EUR values at transaction times
• Gas fees
• Dates of DeFi deposits/withdrawals
• Which tokens generated income (10-year tracking!)
• LP token holdings

Tools for DeFi Tracking

• Koinly - Germany tax reports
• Accointing - Swiss/German focus

Common Mistakes

1. Not understanding 10-year rule: Most critical mistake for DeFi users!
2. Thinking €600 exemption applies per transaction: It's total across all sales
3. Not tracking which tokens generated income: Need to know which have 10-year holding
4. Forgetting €600 threshold is all-or-nothing: €601 gain = €601 taxable, not €1
5. Not reporting DeFi income under €256: Must still track for record-keeping

FAQs

Is DeFi yield taxed in Germany?

Yes. DeFi rewards are income from other sources (sonstige Einkünfte), taxed at personal income rate. €256 annual allowance applies.

What is the 10-year holding period rule?

If your crypto generates income (yield farming, lending, staking), you must hold for 10 years (not 1 year) for tax-free gains. This is the most important rule for DeFi users in Germany.

Does the 10-year rule apply to all my crypto?

Only tokens that were used to generate income. If you never used ETH for DeFi, it's tax-free after 1 year. If you deposited it into Aave for lending, it requires 10 years.

Can I avoid the 10-year rule?

Yes, by not using your crypto to generate income. If you just buy and hold (no staking, lending, yield farming), you only need 1 year for tax-free gains.

Are gas fees deductible?

Gas fees reduce your taxable gain (add to cost basis when buying, subtract from proceeds when selling).

What if I can't track my DeFi history?

Finanzamt requires documentation. Use crypto tax software to reconstruct transaction history. Missing records can result in penalties.