03.02.2026Lower tax court rules on treatment of income from Bitcoin lending transaction
Court denies treatment of Bitcoin as legal tender and follows view of the tax authorities as provided in 2022 guidance
In a decision dated 10 September 2025 and published on 26 January 2026, Germany’s lower tax court of Cologne ruled, for the first time, that Bitcoin does not qualify as legal tender, and therefore income generated from Bitcoin lending transactions by an individual holding the Bitcoin as a private (nonbusiness) asset should be treated as “other income” under section 22 no. 3 of the Income Tax Code (ITC) and not as capital income under section 20 (1) no. 7 ITC. As a result, such income is taxed at the individual’s income tax rate, and not at the flat tax rate of 25% that applies to capital income.
Background and facts of the case
In the case at hand, an individual taxpayer in 2020 generated income from Bitcoin lending (“crypto lending”) transactions. Crypto lending works by putting cryptocurrencies (such as Bitcoin) into a wallet on a lending platform, after which the cryptocurrencies can be borrowed by other parties. Typically, crypto lending platforms require borrowers to repay the borrowed cryptocurrency plus compensation within a fixed term. The remuneration for the lending transaction is typically received in coins or tokens of the same or a different virtual currency. The compensation received is then collected by the lender for as long as they keep their cryptocurrency in the wallet on the platform. Crypto lending platforms act as intermediaries between lenders and borrowers in these transactions. They provide the infrastructure necessary for the transactions to take place, including the implementation of “smart contracts” to verify transactions and balances on the blockchain.
The taxpayer in the case used several different lending platforms for its lending transactions and offered Bitcoins for such transactions to third parties. The taxpayer originally reported the income generated from the Bitcoin lending transactions as “other income” under sec. 22 no. 3 ITC in its 2020 individual income tax return, which was assessed by the tax authorities accordingly. However, the taxpayer then filed an appeal and argued that Bitcoin qualifies as legal tender, and therefore the income had to be treated as capital income in terms of section 20 (1) no. 7 ITC. In order to substantiate the claim, the taxpayer referred to Bitcoin treatment and its acceptance as legal tender in certain Swiss cantons and in El Salvador. The tax authorities rejected the appeal, after which the taxpayer initiated a court procedure.
Decision of the lower tax court
The lower tax court did not agree with the taxpayer’s arguments. The court concluded that, in the case of crypto lending, no capital claim directed at the payment of (fiat) money is transferred. While cryptocurrencies are increasingly accepted as a means of payment, the important point from the perspective of the court is that cryptocurrencies do not constitute legal tender. According to the court’s opinion, creditors in Germany and abroad did not have a legal obligation–at least in 2020 (the year in question in the decided case)–to accept cryptocurrencies, such as Bitcoin, as a means of payment. The mere similarity to legal tender does not, in the view of the tax court, require extending the concept of a capital claim in terms of German tax law to cryptocurrencies. As a result, the court rejected the taxpayer’s claim; an appeal with the federal tax court is currently pending.
Deloitte Germany comments
The decision of the lower tax court is of high relevance for individuals involved in crypto lending transactions. The question decided by the lower tax court deals with the treatment of Bitcoin as legal tender and how to treat the income generated from Bitcoin lending transactions for German income tax purposes:
- If the lending income qualifies as “other income,” it would be taxed at the individual income tax rate of up to 45% plus solidarity surcharge and church tax (if applicable) and reported on the annual income tax return in the year received. Such income is taxable only if the total annual amount of “other income” exceeds EUR 256. If the virtual currency received as a result of the lending transaction is sold within a one-year holding (“speculative”) period, any capital gain would be subject to the individual income tax rate, but if the virtual currency is sold after a one-year holding period, any such gain would be exempt from tax.
- If the lending income qualifies as capital income, the income would be taxed at a flat tax rate of 25% (an annual exemption applies of EUR 1,000 for single filers/EUR 2,000 for married filing jointly) plus solidarity surcharge and church tax (if applicable) at source. If the virtual currency received as a result of the lending transaction is sold, any capital gain would also be subject to the 25% flat tax rate (no holding periods would apply).
The lower tax court’s decision follows the arguments provided by the tax authorities and also confirms the view of the tax authorities as provided in 2022 guidance (see GTLN dated 05/18/22). As the 25% flat tax rate in most cases is significantly lower than the individual income tax rate, treatment of the income from crypto lending transactions as capital income should be more beneficial than treatment as “other income.” This distinction is of high interest for affected taxpayers. It should also be highlighted that the principles described above only apply in situations where the cryptocurrencies are held as private assets by an individual and the crypto lending transactions do not result in income from business activities. It remains to be seen how the federal tax court will rule on these issues.
Your contact
