Panel discussion: Regulation & Taxation of Digital Assets — Recap

On March 2nd we co-hosted a panel discussion about the ‘Regulation & Taxation of Digital Assets’ together with the European Blockchain Association.

We welcomed three expert panelists to answer different questions about hodling, staking, DeFi, and the overall blockchain industry in Germany and Europe. During the 90min event, we covered a lot of ground and even answered live questions from the audience. With this blog post, we would like to highlight the main takeaways and insights.

The setting

First of all, we would like to thank our panelists again for taking the time to participate and for sharing their expert insights with us:

• Dr. Markus Kaulartz is a lawyer at CMS Hasche Sigle and specializes in blockchain/crypto law. He has already published several books and articles and was dubbed a #TopLawyer for IT Law 2020 by WirtschaftsWoche.
• Florian Wimmer is CEO and Co-Founder of Blockpit, a company that offers compliance solutions for cryptocurrencies. Blockpit is a technology provider with a platform that facilitates seamless automated tax reporting for digital assets.
• Werner Hoffmann is CEO and Co-Founder of Pekuna. He studied tax law and computer science before founding Pekuna. Pekuna is a service provider that offers advisory reports, training & online courses as well as memorandums for crypto investors and tax firms.

Also a big shoutout to our co-host, the European Blockchain Association (EBA). They are an initiative to combine, synchronize and leverage blockchain-related activities within Europe. The EBA has many working groups for different topics such as Self Sovereign Identity, Staking Providers, and Blockchain Education. We welcome everyone to check them out, get in touch and join a working group. The EBA is a great platform to co-create and accelerate the adoption of Blockchain technology in Europe.

The main insights

Before diving in, we have to start this section with a disclaimer: this blog post is not financial nor legal advice. Always do your own research and consult your local tax authorities in case you have any specific questions. Given the tremendous growth of the overall digital asset space, investors have many opportunities to put their assets to work. Prior to the event, we collected a bunch of questions from different stakeholders.

For the sake of simplicity, we identified three investor personas for the panel discussion: Hodling Herby who simply holds onto his assets, Staking Steve who stakes his assets with a validator, and last but not least, DeFi Daisy who participates in yield farming and lending. We’re briefly summarizing the main take-aways for each type of investor in the following paragraphs before we recap the general discussion in the end.

Hodling, Staking, and DeFi

In Germany and Austria, the Hodling Herbies among us might be relieved to hear that they can

• sell their digital assets tax-free after a one-year holding period, because then the investment is not considered speculation and no speculation tax applies.
• In case you held on to your assets for more than 12 months without putting them to work, you can enjoy the gains in full and do not have to declare them in your tax report (you can, of course, for transparency reasons).
• However, all panelists advise any kind of trader to carefully document his/her activities. This way, you will be able to prove that you held on to the respective asset long enough to sell it tax-free.

A heavily discussed topic is whether or not staking prolongs the holding period from one to ten years. While there aren’t any precise court rulings or guidance from authorities yet, Staking Steve could argue that ‘stakeable’ digital assets are economic goods rather than capital. Furthermore, if Staking Steve stakes via non-custodial solutions, he most likely stakes via smart contracts and has no institution as a counterparty. Also, he does not give up control over his funds and is in possession of his private key. Therefore, Staking Steve has no realization and the tokens are not considered to be used, hence the one-year holding period is most likely to apply.

• The income generated from staking, staking rewards, should be declared as ‘other income’ in Germany and Austria. The taxable amount is declared as soon as Staking Steve has control over them.
• Selling the rewards, even with a gain in valuation is most likely not a taxable event, because there was no actual acquisition of those rewards.
• However, there is no absolute clarity in the regulation yet. For networks with a continuous reward payout, it might be worth considering using an automated solution for the documentation of your activities.

The fees DeFi Daisy earns through providing liquidity to a pool should definitely be documented as well. Furthermore, she might consider declaring them as ‘other income’ since it does not fit any other income class due to its novelty.

• The event of DeFi Daisy adding liquidity to the pool, so swapping the assets she puts into the pool for LP tokens is most likely considered a realization of gains and she should declare it in her tax report.
• If DeFi Daisy provided liquidity for more than one year, swapping the LP tokens back for the tokens she initially provided to the pool as well as any fees she received for the provision of liquidity is likely tax-free, because she has been holding the LP token for over a year.
• Lending out assets via platforms such as Aave is also most likely not prolonging the holding period from one to ten years.
• However, these are legal opinions based on proper argumentation — there is no precise court ruling or law in place yet.

General discussion

With the blockchain space innovating at an unprecedented pace, it is no surprise that regulators have a hard time keeping up to speed. While there are still many legal uncertainties, the regulators seem willing and engaged to push this industry forward and establish Europe as a ‘crypto-friendly’, forward-looking jurisdiction. The German government positioned itself as positively minded towards the industry. The blockchain strategy published in 2019 gives reason to assume favorable rules and regulations being passed in the years to come. However, one can also expect a draft about EU-wide regulations regarding crypto exchanges to be released this year. This could mean that exchanges could be required to provide authorities with transactional data of their users without them having to subpoena the exchanges to do so. While regulation might result in an outcry of many ‘cyberpunks’, it could — if done correctly — also mean more consumer protection and lead to more players entering the space. As industry ‘insiders’, it is our job to promote this space and educate lawmakers so that they can draft proper regulation.

Connect & follow

While we definitely did not cover everything that we discussed during the panel in this blog post, we sure hope that it provided you with some interesting takeaways and insights. To get the full experience and extract every tiny bit of information, make sure to join the next event.

We highly encourage you to follow the panelists and the entities they represent on the respective social media channels. Also, make sure to check out the European Blockchain Association. In case you have any questions or feedback, always feel free to reach out to us via eMail, Twitter, or Telegram — we’d love to chat!

The panelists

Florian Wimmer & Blockpit

• Homepage: https://blockpit.io/
• Twitter: @blockpit_io // @FlorianWimmerAT
• LinkedIn: https://www.linkedin.com/company/blockpit/ // https://www.linkedin.com/in/florian-wimmer/
• Telegram: t.me/cryptotaxio

Werner Hoffmann & Pekuna

• Homepage: https://pekuna.de/
• Twitter: @Pekuna_Steuer
• LinkedIn: https://www.linkedin.com/company/pekuna/ // https://www.linkedin.com/in/werner-hoffmann/

Dr. Markus Kaulartz & CMS

• Homepage: https://cms.law/en/deu/people/markus-kaulartz
• Twitter: @CMS_Law_Tax // @MarkusKaulartz
• LinkedIn: https://www.linkedin.com/company/cmsdeutschland/ // https://www.linkedin.com/in/markus-kaulartz/

European Blockchain Association

• Homepage: https://europeanblockchainassociation.org/
• Twitter: @EUBLASORG
• LinkedIn: https://www.linkedin.com/company/european-blockchain-association-e-v/

About Staking Facilities

We are a Munich-based, Web 3.0 infrastructure, and service provider. We run industry-grade, highly secure physical infrastructure co-located in top-notch, certified data centers within reach of our company headquarters. Guaranteed uptime, biometric security, and redundant power supply reinforce a continuous and secure operation. Through our state-of-the-art monitoring, we always know about the status of our servers and are alerted immediately if any abnormalities occur. For our customers, we offer non-custodial delegation services, personal support, and tools for a variety of thoroughly vetted public Proof-of-Stake blockchains.