The Fine Print on Crypto Lending Yields: Risks, MiCA Exclusion, and German Tax Rules

Interest on cryptocurrencies sounds like the best of both worlds: you keep your holdings and still earn a running return. That is how platforms advertise their lending products, at rates well above an instant-access savings account.

The claim is only half true. What you keep, as a rule, is not your coin but a claim to get it back. What that claim is worth depends on who sits on the other side and which law applies when things go wrong. In the European Union the answer to the second question is thinner than most people expect: the regulation that has ordered the European crypto market since 2024 expressly carves this very business out of its scope.

In crypto lending you leave your coins for a certain period with another market participant, who puts them to work and pays you a fee for it. In tax terms this is a temporary transfer of use; in everyday language almost every provider calls it interest.

The decisive step happens when you press the confirmation button: your coins move into the custody of a company or into a smart contract, and what remains in your account is a number representing a right to repayment. Anyone holding coins themselves carries the price risk and the risk of losing access; anyone lending them carries both of those and adds the counterparty's default risk on top. The return is the payment for that third risk.

Interest does not arise out of the blockchain itself. Someone has to be willing to pay for borrowed coins, and that is mainly traders who want to enlarge a position with borrowed capital: whoever bets on rising prices borrows stablecoins and buys coins with them, and whoever bets on falling prices borrows the coin itself and sells it.

From this follows a rule that every market cycle confirms: lending yields rise when many participants want to work with leverage, and they fall when that appetite disappears. Persistently double-digit rates are therefore a warning sign rather than a badge of quality. The most useful question to put to any advertised yield is this: who pays this interest, and why are they doing it?

In centralised lending, usually called CeFi, you transfer your coins to a company that pools the holdings of many customers and lends them on to institutional trading partners. Your account shows a growing balance, and payouts happen at the touch of a button as long as there is enough liquidity.

The convenience has a price, and it is set out in the terms and conditions rather than on the product page. You usually do not know who the coins are lent to, or how far the provider transforms maturities, meaning how much it swaps customer money that can be called at any time for longer-dated loans.

How quickly that balance tips was demonstrated by the market in 2022, when several large centralised crypto lending providers halted withdrawals within a few weeks. Anyone invested at the time had done nothing wrong in their own wallet and still stood there without access. Before you hand over any balance, the provider therefore belongs on the test bench.

In decentralised lending no company stands between you and the borrower. You pay your coins into a liquidity pool managed by a smart contract. The program code determines who may borrow how much and when their collateral is realised; the interest rate usually follows the utilisation of the pool automatically. In exchange, the risk moves to two other places.

A smart contract does exactly what it was programmed to do, even where what was programmed is wrong. Review reports by external security firms, known as audits, reduce that risk without removing it: an audit is a snapshot of one state of the code, which is developed further afterwards.

Every lending protocol needs a price in order to decide when collateral is no longer sufficient. An oracle supplies that price. If it is manipulated, for instance through an artificially distorted quote on a thinly traded market, an attacker can borrow more than the collateral supports.

For your lent balance to have any chance of repayment, the borrower has to put something up. In the crypto market that happens through overcollateralisation: whoever wants to borrow value deposits more value than they receive. Common loan-to-value limits sit between 50 percent and 80 percent, depending on how volatile the coin is.

A worked example: a borrower deposits bitcoin worth 10,000 euros and may borrow against 60 percent of it, receiving 6,000 euros in stablecoins. If the bitcoin price falls by a third, the collateral is still worth around 6,700 euros, and the claim moves close to the limit. This is where the liquidation threshold takes hold: the protocol sells the collateral automatically before the claim becomes uncovered.

For you as the capital provider this automatic mechanism is the real protection, and it holds only as long as the collateral can actually be sold at the decisive moment. In a rapid market slump many positions are liquidated at once, the sell orders meet thin order books, and the price achieved falls below the one assumed. If a gap remains, it is called bad debt. In case of doubt it is borne by the capital providers, which means by you.

The Markets in Crypto-Assets Regulation, MiCA for short, has applied in the European Union since 2024. Under it, providers need an authorisation, the custody of customer assets is regulated, and costs and risks have to be disclosed. Many investors conclude from this that everything is covered.

For lending that does not hold, and the Regulation says so itself. Recital 94 reads: "This Regulation should not regulate crypto-asset lending and borrowing, including of e-money tokens, and therefore should not prejudice applicable national law. The feasibility and necessity of regulating such activities should continue to be assessed." Elsewhere the same text instructs the European Commission to assess the need for such regulation in the first place.

A trading platform can therefore quite legitimately advertise a MiCA authorisation and offer, on the same interface, a lending product to which the protective provisions of that authorisation do not apply. The European securities regulator ESMA pointed providers to precisely this in a statement in July 2025: anyone offering regulated and unregulated services side by side must not give customers a false impression of the scope of protection. Your provider's authorisation therefore says little about how well your lent balance is protected.

Bank balances in the European Union are protected by the statutory deposit guarantee scheme up to 100,000 euros per customer and institution. That protection attaches to the concept of a deposit, and crypto-assets are not deposits. For lent coins there is accordingly no comparable statutory backstop, however much a provider's interface may recall a current account.

The misconception is particularly persistent with stablecoins. A token pegged to the euro carries a stable price yet remains a crypto-asset. If you lend it, you part with it just as you would with a bitcoin, and in the provider's insolvency you stand in line as an ordinary creditor. Voluntary insurance or protection funds offered by some providers are private-law promises with upper limits, and they carry exactly as far as the company behind them.

For tax purposes Germany treats lending income differently from interest on a savings account. The flat-rate withholding tax does not apply here; what applies is other income from services. The Federal Ministry of Finance set this down in its circular of March 6, 2025 on crypto-assets, which contains a section of its own on lending.

Three consequences follow. First, your personal income tax rate applies instead of the flat 25 percent. Second, a separate exemption limit takes hold: under Section 22 no. 3 sentence 2 of the Income Tax Act such income stays tax-free where it amounts to less than 256 euros in the calendar year. Anyone crossing that mark pays tax on the whole amount and not merely on the excess, because an exemption limit works differently from an allowance. Third, the moment of receipt counts: coins received are valued at their market price at the moment they are credited and count as acquired at the same time, which starts a holding period of its own for any later sale.

It is this double role of every credit entry that defeats manual record-keeping: with daily payouts, several hundred inflows arise over a year, each with its own price and acquisition date.

Few rules have attracted as many outdated guides as the extended holding period. Section 23(1) sentence 1 no. 2 sentence 4 of the Income Tax Act extends the speculation period for an asset from one year to ten where income was earned from its use in at least one calendar year. On the wording, lent coins meet that test.

A widespread claim is that this sentence has since been deleted. It has not; it stands unchanged in the statute in force. The question is resolved on a different level: in its circular of March 6, 2025 the Federal Ministry of Finance makes clear, under a subheading of its own, that it does not apply the extension to crypto-assets. For private investors the one-year period therefore remains, even where the coins were lent out in the meantime. The difference between a deleted provision and one that is not applied is no quibble: a ministerial circular binds the tax offices, but it does not bind the courts.

Here is the calculation that rarely appears in marketing material. Suppose you lend stablecoins worth 10,000 euros at an advertised rate of 5 percent a year. Gross, that gives 500 euros. The 256-euro exemption limit is exceeded, so the full amount is taxable. At a personal tax rate of 30 percent, around 350 euros remain, before the solidarity surcharge and church tax. From that, withdrawal and network fees come off, and with decentralised protocols the transaction costs of every single interaction come off as well.

The result is dominated by another figure altogether, the price. An annual return of 5 percent on a coin that loses 30 percent of its value over the same period produces no gain. For most private investors, lending therefore makes recognisable sense above all with stablecoins, because there the price risk stays small and the yield becomes visible at all.

One tried-and-tested rule of thumb first: lend only the part of your holdings whose complete loss you could absorb.