Crypto funds in Germany

A German investment fund is set up under the Kapitalanlagegesetzbuch (KAGB) and run by a management company (Kapitalverwaltungsgesellschaft) with a BaFin license. The KAGB sorts funds by investor. UCITS funds and retail AIFs are open to everyone, Spezial-AIFs only to professional and semi-professional investors. A semi-professional investor commits at least 200,000 euros and confirms in writing that they know the risks, as section 1 KAGB defines it.

The assets of a fund are kept apart from the management company's own assets, and under section 99 KAGB they are not part of its insolvency estate. A depositary bank holds them and checks the fund's transactions. Crypto first entered this system in August 2021, when the Fondsstandortgesetz allowed Spezial-AIFs to hold crypto assets. The KAGB now takes its definition of crypto assets from the EU's Markets in Crypto-Assets Regulation (MiCA).

• UCITS funds: the eligible assets listed in sections 192 to 198 KAGB do not include crypto assets.
• Open retail AIF (Sonstiges Investmentvermögen): up to 10 percent in crypto assets held for investment, if their market value can be determined, under section 221 KAGB.
• Closed-ended retail AIF: up to 10 percent, under section 261 KAGB.
• Open Spezial-AIF with fixed investment terms: up to 20 percent, under section 284 KAGB.
• General open Spezial-AIF: any asset whose market value can be determined, spread by risk, under section 282 KAGB. This is the structure for funds that invest mainly in crypto.

Management companies may also offer crypto-asset services under MiCA, such as portfolio management of crypto assets and advice on them, after notifying BaFin (section 20 KAGB).

Most crypto products on German stock exchanges are exchange-traded products, legally notes of the issuer backed by the coins. A buyer of such a note holds a claim against the issuer, secured by the collateral, and the product is not a fund under the KAGB. Bitwise Europe in Frankfurt, for example, issues physically backed ETPs on bitcoin, ether and other assets. The page on crypto ETPs explains why European issuers use notes for these products.

Tokenized funds are a separate topic. The Kryptofondsanteile regulation of June 3, 2022, lets a German fund issue its units as electronic units recorded in a crypto securities register. Such a fund can hold bonds or money market instruments; only the record of who owns the units moves onto a blockchain. Tokenized funds have their own page.

For a private investor, a fund unit is taxed under the Investment Tax Act (InvStG), whatever the fund holds. Distributions, the annual advance lump sum (Vorabpauschale) and gains from selling units are investment income under section 16 InvStG, taxed at the flat rate of 25 percent plus solidarity surcharge. The one-year holding period for directly held crypto does not apply to fund units.

The partial exemptions of section 20 InvStG lower the taxable share for equity, mixed and real estate funds, which need at least 25 percent equities or 51 percent real estate. A fund that holds only crypto gets none. Coins held directly follow section 23 EStG, described on the page on crypto tax in Germany.

Finance Loop is the meeting place in Germany for fund managers and investors who hold crypto in portfolios. It connects the finance, IT and AI communities, with events in Frankfurt, Munich, Berlin and Hamburg.

F5 Crypto, the Berlin manager of the F5 Crypto Fund, and Bitwise Asset Management, whose European ETPs are issued in Frankfurt, are event and network partners of Finance Loop, as is the Multichain Asset Managers Association, which works on funds run on blockchains. At a MarketVector Indexes panel at TechQuartier in Frankfurt, Dominik Poiger of Deutsche Digital Assets gave an overview of the crypto ETP market. The masterclass Bitcoin for Investors covers the routes into bitcoin for professional investors, from spot ETFs to direct custody.

Yes. A retail AIF may hold up to 10 percent in crypto assets such as bitcoin, a Spezial-AIF with fixed investment terms up to 20 percent, and a general Spezial-AIF may invest mainly in crypto. A UCITS fund may not hold bitcoin directly.

A crypto fund is a pool of assets run by a licensed management company, kept apart from that company's own assets. A crypto ETP is a note issued by the product provider and backed by coins; the buyer holds a claim against the issuer. Both can trade on an exchange.

Private investors pay the flat tax of 25 percent plus solidarity surcharge on distributions, the Vorabpauschale and sale gains of fund units, under the Investment Tax Act. The one-year tax exemption for directly held crypto does not apply to fund units.

Retail AIFs, with at most 10 percent in crypto, are open to private investors. Funds that invest mainly in crypto are Spezial-AIFs, open only to professional investors and to semi-professional investors who commit at least 200,000 euros.