How is crypto lending taxed in Luxembourg?

Crypto Lending

How is crypto lending taxed in Luxembourg?

What is crypto lending?

Crypto lending is a lending transaction in which cryptocurrencies are given out on loan. This lending transaction is mostly carried out via special lending platforms of DeFi projects. Ultimately, it is nothing more than a crypto-based loan.

On the corresponding platform, the lender, i.e. the person who lends the cryptocurrency, and the borrower, i.e. the person who wants to borrow the cryptocurrency, are brought together.

How is interest income from crypto lending taxed in Luxembourg?

If the interest income received through Crypto-Lending is income from other benefits according to Article 99 Luxembourg Income Tax Law (LEStG), an exemption limit of 500 Euros per tax year (Article 99bis (2) LEStG) applies. Any amounts exceeding this limit will be taxed at the personal income tax rate up to 42% (top tax rate). In addition, the subsequent sale pursuant to Article 99 LEStG of the cryptocurrency obtained through the lending would not be taxable due to the lack of an acquisition transaction.

However, both in Luxembourg and in Germany, the taxation of the interest received through crypto-lending has not been fully clarified. On the one hand, it is discussed whether this is capital income according to Article 97 LEStG or Section 20 (1) No. 7 EStG, since the lending of the cryptocurrency is a classic, interest-bearing loan. On the other hand, tax offices repeatedly assume that the interest income generated by Lending is income from other services pursuant to Article 99 LEStG or Section 22 No. 3 EStG.

The cryptocurrency received in the form of interest is to be valued at the time of receipt. Therefore, it is not capital income, since the contribution of the cryptocurrency is not a contribution of capital, but rather a contribution in kind. This is justified by the fact that a capital claim must refer to a monetary payment, but not to a payment in kind, as is the case with cryptocurrencies.

How does lending work?

When lending, the lender gives other users of the respective platform a part of its cryptocurrency to use for a limited time. In return, the lender receives interest in the given or another cryptocurrency, often also in stablecoins. The amount is based on a predefined percentage value, which in turn depends on the number of cryptocurrencies provided.

The following conditions are agreed upon in advance

  • the interest rate,
  • the amount of coins to be lent
  • the period of the transfer of use.

After the agreed period of time, the lender gets back his lent cryptocurrency (crypto currency) including the interest.

What is deposited as underlying collateral in Lending?

Platform users or borrowers only have to deposit a cryptocurrency as collateral when lending. Which cryptocurrency the borrower may use as collateral depends on the respective platform.

No prolongation of the holding period for Lending

It is also controversially discussed whether the lending of a cryptocurrency leads to a prolongation of the holding period according to Article 99bis LEStG. Accordingly, a prolongation of the holding period only occurs if an asset is

  • is used as a source of income and
  • income is generated with it.

By use as a source of income it is to be assumed that the assets involved form an independent basis of income. The decisive question is therefore whether or not income is generated with the cryptocurrency.

However, in the case of lending, generally no income is generated from the asset (the cryptocurrency), but from the lending transaction (as income from the capital claim). Because there is no abuse in these cases, in our view, the holding period of half a year can remain. Unfortunately, the Luxembourg tax office has not yet commented specifically on this issue. In Germany, the Bavarian State Tax Office has confirmed that the interest received is not an output of the “other asset foreign currency credit balance”, but rather an output of the actual capital receivable.

No matter what your tax opinion is, we at always recommend our clients to disclose facts such as lending transparently and fully in their tax return so that the tax office in Luxembourg cannot assume any tax evasion. We assist and support you in your tax return and in the transparent presentation of your lending in order to avoid unnecessary disputes with the tax office in Luxembourg in advance.

Our advisory services in Luxembourg for lending

We support you in

  • the representation of the tax assessment vis-à-vis the tax office in the event of a dispute, as well as
  • the preparation of your tax return in Luxembourg for your cryptocurrencies.

Your tax advisor in Luxembourg for Cryptocurrency

Please contact us if you have any further questions!

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