DeFi and German income tax: section 20, section 22 no 3 — or a fund?
Most advice on this stops at whether a DeFi return falls under section 20 or section 22 no 3 EStG. For part of the market that is the wrong question — there the Investment Tax Act is in play, and with it an advance lump sum taxed on income that never arrived.
- "DeFi" is not a tax category. Each product has to be assessed on its own.
- Whether lending falls under section 20(1) no 7 or section 22 no 3 EStG is before the Federal Fiscal Court — we are conducting that case.
- For vaults and index tokens, applying the Investment Tax Act is defensible and sometimes close to obvious.
- Note: where it applies, the one-year holding period in section 23 EStG disappears entirely.
- The advance lump sum under section 18 then applies — tax without any cash arriving. Base rate for 2026: 3.20 per cent.
- The partial exemption is zero, because crypto assets are not equity participations.
DeFi is not a category
The most common mistake in this field is looking for the one answer.
"DeFi" gathers together everything that happens on a blockchain without a central counterparty. For tax purposes those transactions have almost nothing in common. Supplying liquidity to a trading mechanism is something quite different from placing capital in a vault so that an algorithm can reallocate it under fixed rules. That both run through a wallet and a smart contract is a technical similarity, not a tax one.
Four regimes therefore stand side by side, not two:
- Section 22 no 3 EStG — other income from supplies. The residual category under which the tax authorities place staking and lending income. Threshold of 256 euros.
- Section 20 EStG — investment income. A separate flat rate, but no deduction of actual expenses under section 20(9) EStG.
- Section 23 EStG — private disposal, for selling the tokens themselves. One-year period, threshold of 1,000 euros.
- The Investment Tax Act — fund income, where the product is an investment fund. It displaces section 23 EStG entirely.
The fourth regime is almost never examined in practice. That is precisely where the risk lies: it has the widest consequences, and it is the one an audit will prefer in case of doubt.
Section 20 or section 22 no 3 EStG — the unresolved basic question
Before turning to the Investment Tax Act, the simpler classification has to be settled. It is open too.
The tax authorities place ongoing income from staking and lending under section 22 no 3 EStG. For lending that is not self-evident: transferring crypto assets for use in return for a payment creates, in economic terms, a claim. If that were a capital claim within section 20(1) no 7 EStG, the separate flat rate would apply.
The Cologne Tax Court held on 10 September 2025 (3 K 194/23) that consideration for transferring Bitcoin for use is not a capital claim of that kind. The appeal is pending before the Federal Fiscal Court (VIII R 22/25). The senate is additionally examining whether cryptocurrencies are comparable to foreign currencies.
We are conducting that case ourselves. Our cases
Why this decides more than the rate
The difference between the personal rate and the separate flat rate can be around twenty percentage points. It is not the only consequence, and usually not even the most important:
- Deductible costs. Under section 22 no 3 EStG the actual expenses are deductible; under section 20 EStG they are blocked. Which costs are deductible
- Loss offsetting. Two separate pools that do not communicate with each other. The offset pools
- Threshold or allowance. The 256 euro threshold under section 22 no 3 against the savers' allowance under section 20.
- Holding period. Indirectly, also the reach of section 23 EStG for the underlying holding.
While this is open, the assessment should not become final. Where a case is pending before the Federal Fiscal Court, the appeal is stayed by operation of law under section 363(2) sentence 2 of the Fiscal Code. A model notice of appeal with wording
The third option: the Investment Tax Act
For part of the market the question of section 20 against section 22 no 3 EStG is beside the point, because a prior regime applies.
Section 1(2) of the Investment Tax Act refers to section 1(1) of the Capital Investment Code. An investment fund is any undertaking for collective investment which raises capital from a number of investors in order to invest it in accordance with a defined investment policy for the benefit of those investors, and which is not an operating business outside the financial sector.
The governing interpretation comes from the BaFin decision of 14 June 2013 together with the ESMA guidelines.
Neither the Federal Ministry of Finance nor BaFin has so far addressed DeFi protocols as investment funds. The ministry circular of 6 March 2025 expressly leaves investment tax questions aside.
The analysis therefore runs directly on the statutory definition. That is uncomfortable, because there is no paragraph to rely on — but it also means the classification can be argued.
- Sec. 1(2)refers to the fund definition in the Capital Investment Code
- Sec. 1(2) s. 2deeming provisions, including the single-investor fund
- Sec. 1(3)exceptions: holdings, securitisation vehicles, cooperatives
- Sec. 26 InvStGrequirements for a specialised fund — never met
- BaFininterpretative decision of 14 June 2013
- BMF 06.03.2025leaves investment tax law aside
A specialised investment fund is always ruled out for DeFi, because the requirements of section 26 — supervision, restricted investor base, investment limits — cannot be met. What remains is always the retail investment fund.
The four critical features
The classification turns on these four points. Three are arguable; one points almost always towards the fund.
An undertaking
Neither the AIFM Directive nor the Capital Investment Code defines the term. No particular legal form is required; a sufficiently settled structure suffices. A smart contract with fixed rules, a method of calculating shares and an entry and exit mechanism is arguably such a structure.
The counter-argument: there is no legal entity and no attributable manager. For tax purposes that weighs less heavily than in regulation, because section 1(2) turns only on the features, not on whether a licence could be granted.
Raising capital
ESMA requires commercial steps towards raising capital. A promoted vault with a front end, marketing and TVL targets meets that. A bare protocol with no identifiable provider does not clearly do so.
A defined investment policy
The pivot of the whole analysis. A smart contract that allocates and rebalances capital under predefined criteria is more tightly bound to a strategy than many an actively managed fund — here the policy is not merely defined but cast in code, and so cannot even be departed from.
Where it is absent: where the product makes no investment decision but only supplies liquidity to a trading mechanism, there is no policy.
Not an operating business outside the financial sector
In DeFi practically never satisfied. This feature therefore regularly tells in favour of fund classification, not against it — a point often used the wrong way round in discussion.
On the ESMA guidelines, an unregulated investment club exists where the investors as a group hold ongoing control over day-to-day management. For governance-driven DAOs that is a workable line of argument — what is then missing is the external management that makes a fund a fund.
Anyone relying on this should document the governance: which decisions genuinely rest with the token holders, and are those rights actually exercised? A voting right never used carries the argument less far.
Typical products classified
An assessment on the test above. It does not replace examining the actual product — protocols change their mechanics.
-
Tokenised index and basket products
Set Protocol, Index CoopFund classification is very close. Economically this rebuilds an ETF: capital from several investors, fixed inclusion criteria, regular rebalancing for their benefit.
fund classification close -
Yield vaults and aggregators
Yearn typeStrong arguments for the Investment Tax Act. Capital is pooled, allocated under an algorithmically defined strategy and reallocated — and all of it for the benefit of the depositors.
fund classification close -
Investment DAOs with a treasury
governance tokensClose to an alternative investment fund. The rescue is the boundary with an investment club: where the investors as a group hold ongoing control over day-to-day management, the element of external management is missing.
contested -
Liquid staking
stETH typeContested. The service character of validation tells against an investment strategy — nothing is invested; a technical service is supplied.
contested -
AMM liquidity pools
Uniswap, CurveProbably not. There is no investment decision: the pool supplies liquidity to a trading mechanism for consideration, and the income is a share of fees.
not a fund -
Lending protocols
Aave, CompoundNo. Individual claims arise, not a common pool of assets. The classification runs through section 20(1) no 7 EStG — which is itself the open question set out above.
not a fund -
Centrally managed crypto trusts and US spot ETFs
Grayscale typeRegularly a foreign investment fund. Here the Investment Tax Act is not the exception but the normal case — and investors are usually unaware of it.
fund classification close -
Crypto ETNs and ETPs with a delivery claim
physically backedNo. These are bearer notes carrying a claim to delivery. The Federal Fiscal Court settled that logic for Xetra-Gold (IX R 33/17).
not a fund
The harder a product advertises its "strategy", the greater the Investment Tax Act risk. What is sold in marketing as active management is, on the statutory test, exactly the feature that carries fund classification.
What applies if the Act bites
At fund level, little happens. The force of it lands on the investor.
Section 6 of the Investment Tax Act catches only German-source participation income, German real estate income and other German-source income. For a protocol with no German connection that does not apply. The fund level is therefore regularly irrelevant to the tax burden.
Section 23 EStG is displaced
The one-year holding period disappears entirely. Anyone who believes they are selling tax free after twelve months is in fact taxed at 25 per cent plus the solidarity surcharge — across every year affected. For older holdings that is a substantial exposure to correcting past returns.
Partial exemption: zero per cent
Crypto assets are not equity participations within section 2(8) of the Act. What exists is an "other fund", and for that type section 20 provides no exemption rate. The common assumption that at least the partial exemption applies does not hold here.
The advance lump sum under section 18
Tax without any receipt, deemed received on the first working day of the following year. The section below goes into this in detail.
No withholding at source
There is no German custodian. That produces a filing duty under section 32d(3) EStG, entry in the Anlage KAP-INV form and taxation under section 32d(1) EStG. Nobody withholds the tax for you — and nobody reminds you.
Separate loss offsetting
Losses fall into the general offset pool of section 20(6) EStG and are precisely not available against gains on directly held crypto under section 23 EStG. The interplay of the exemption threshold and the savers' allowance shifts as well.
Business assets and a change of status
Within business assets the deduction bar in section 21 of the Act applies; the halved partial exemption for trade tax runs empty for want of a rate. If a protocol changes its strategy and with it the classification, the deemed disposal in section 22 of the Act needs to be considered.
The advance lump sum in detail
The consequence that draws the most resistance in a meeting: tax on income nobody received.
The starting point is the base return: the redemption price at the start of the calendar year, multiplied by the base rate, of which 70 per cent is taken. The 30 per cent reduction stands as a flat allowance for management costs.
Distributions made during the year are deducted from that base return. What remains is the advance lump sum — capped at the actual increase in value over the year. If the value has fallen, it is nil.
In DeFi there is no redemption price. The exchange or market price takes its place. With thinly traded vault tokens even that starting value is a question of evidence.
The cap on the increase in value softens the charge in falling years. In rising years it applies in full — to a holding whose value may stand far lower again the year after. What is taxed is an interim state.
And no money arrives. The tax has to be paid from other funds, or something has to be sold — which is itself a taxable event.
- Base rate 20263.20 % (ministry circular of 13 January 2026)
- Base rate 20252.53 %
- Base rate 20242.29 %
- Applied70 % of the base rate on the value at the start of the year
- Capthe increase in value over the calendar year
- Deemed receiptfirst working day of the following year, sec. 18(3)
- FilingAnlage KAP-INV, no withholding at source
The base rate is derived each year from Bundesbank yield curve data as at the first trading day and published in the Federal Tax Gazette. It has risen sharply of late — from 2.29 to 3.20 per cent within two years.
A vault token stands at €100,000.00 on 1 January 2026. There are no distributions, and the value rises over the year to €130,000.
Base return: €100,000.00 × 3.20 % × 70 % = €2,240.00
The increase in value is €30,000 and therefore exceeds the base return — the cap does not bite. The advance lump sum is €2,240.00 and is deemed received on 4 January 2027. At 25 per cent plus the solidarity surcharge that produces tax of roughly €590.80 — payable although not one euro has arrived.
Had the value fallen to €80,000 in the same year, the advance lump sum would be nil. The tax therefore arises only in rising years — but there it arises reliably.
The second front: financial regulation
For clients on the provider side this is often the bigger problem, not the tax.
Anyone who accepts fund classification for tax purposes has at the same time handed over a regulatory argument. Where an alternative investment fund exists, the manager requires a licence under sections 20 f. of the Capital Investment Code. Operating without one is a criminal offence under section 339.
A further effect concerns the market side: if the token is a fund unit, it falls outside the scope of MiCAR. What looks from one angle like relief is, from the other, a move into a considerably stricter regime.
The tax and regulatory classifications cannot be kept cleanly apart. An opinion that accepts fund classification can do a provider more damage than the tax question it was meant to answer.
In provider cases we therefore advise with both sides in view from the outset, and work with specialist law firms on the regulatory assessment. Questions of financial regulation and capital markets law are outside the scope of our advice.
What this means in practice
Four steps while the question remains unresolved.
Sort the holding
Which positions are passively held vault or index tokens, and which are pools and lending? For the second group the familiar regime of sections 22 no 3, 20(1) no 7 and 23 EStG continues to apply. Only the first group needs the fund analysis.
Document the analysis
Work through the four features one by one and record the result in writing — with the product terms as they stood when you acquired. Reaching reflexively for section 23 EStG is not a decision but the absence of one.
Disclose the treatment chosen
Where your classification departs from the one an audit might choose, that belongs in the return. Setting out your legal view with reasons shows visibly that you are not acting in secret — the most effective protection against an allegation of intent. Why that decides the surcharge
For larger holdings: a binding ruling
Under section 89(2) of the Fiscal Code that is the only reliable route. An audit can in practice always pick whichever reading favours the revenue — and with crypto assets that is almost always the Investment Tax Act, because it removes the holding period.
- Vault and index tokens are recorded separately from the rest of the holding
- The product terms at the time of acquisition are secured, not merely today's
- The analysis of the four features is documented in writing
- If accepted: Anlage KAP-INV rather than Anlage SO, with the advance lump sum computed for each year
- If rejected: the reasoning is disclosed in the return
- The assessment is kept open by appeal until the question is settled
- In provider cases the regulatory side has been assessed in parallel
Questions and answers
How is DeFi taxed in Germany?
Why is the line between sections 20 and 22 no 3 EStG unresolved?
What does the Investment Tax Act have to do with DeFi?
Have the tax authorities or the financial regulator said anything?
What happens to the holding period if the Investment Tax Act applies?
What is the advance lump sum?
How high is the base rate?
Will my platform withhold the tax?
Can I offset losses from such a fund against crypto gains?
What do you advise where the classification is unclear?
Legal position: 26 August 2026. Sources: sections 1, 2(8), 6, 16, 18, 20, 21, 22 and 26 of the Investment Tax Act; section 1(1) and sections 20 f. and 339 of the Capital Investment Code; sections 20, 22 no 3, 23 and 32d of the Income Tax Act; section 89(2) of the Fiscal Code; BaFin interpretative decision of 14 June 2013 with the ESMA guidelines; Federal Ministry of Finance circular of 6 March 2025 on crypto assets; ministry circular of 13 January 2026 (IV C 1 - S 1980/00230/012/001) on the base rate; Federal Fiscal Court, 6 February 2018, IX R 33/17 (Xetra-Gold).
Cases: BFH VIII R 22/25 on the classification of lending income, lower court Cologne Tax Court of 10 September 2025, 3 K 194/23.
The classification of the individual products is our assessment on the test set out above; nothing has yet been decided on DeFi and investment tax law by the highest court or by administrative guidance. Protocols change their mechanics, so every classification has to be made by product and by date. This article is not advice on an individual case. Questions of financial regulation and capital markets law are outside the scope of our advice. Where this English text and the German version differ, the German version governs.