The purchase by means of a Wallet is the traditional form of crypto-buying and a direct investment in cryptocurrencies.
There are different types of wallets, whereby a rough distinction is made between hot wallets (online) and cold wallets (offline). The hot wallets include, among other things, the wallets listed on crypto platforms. There private investors can set up a wallet, transfer liquidity from the current account, buy and store cryptocurrencies. Providers such as Bison, Binance and Coinbase have established themselves in this country, which store the cryptocurrencies and the associated private keys of the wallets on behalf of the customers.
In parallel, the Bank Deposit a convenient alternative for investing in cryptocurrencies. The driver of this development is the increasing financial market regulation, which gives asset managers, stock exchanges and banks clear rules for dealing with financial products based on cryptocurrencies.
The high investor demand for cryptos since the end of 2020 has led to a wide range of financial market products. Bank customers can invest in single or multiple cryptocurrencies primarily using exchange-traded products (ETPs), such as ETNs, ETCs or ETIs.
The aim of crypto ETPs is the best possible reproduction of the performance of the underlying cryptocurrency(s). The majority of the crypto ETPs offered use the physical deposit for this purpose. This means that the cryptocurrencies are purchased directly and stored with a trustee. The investor thus only indirectly buys cryptocurrencies, which he could, however, also have delivered to some providers.
Pros and Cons: Availability vs. Security
The wallet most closely corresponds to one of the basic ideas of the crypto world, namely independence from the financial system. Accordingly, the wallet offers 24/7 access to your own coins, which can thus be traded or transferred at any time. However, with increasing freedom, personal responsibility also increases and with it the risk that, for example, access to the hot or cold wallet will be lost.
The bank deposit offers customers a familiar and legally secure framework for trading and safekeeping of their indirect crypto investments. Unlike in the wallet, these can only be traded in the bank deposit at the usual exchange times. The exchange trading itself works as with the other securities.
Taxation on Cryptos Can Vary Greatly
Depending on whether the cryptocurrency is purchased directly via wallet or indirectly via a financial instrument in your own bank account, the basic taxation of these income varies.
Wallet: When buying directly from a private person, cryptocurrencies are subject to income tax as “other economic goods” according to § 2 I No. 7 EStG. The sale is therefore a private sale transaction and the regulation according to § 23 EstG applies. Accordingly, a distinction must first be made according to the holding period. If this is more than twelve months, the capital gains (and losses) are tax-free. Under this, the profit is subject to personal income tax, taking into account a exemption limit of up to 600 euros.
Repository: In the case of the indirect purchase of cryptos via a financial instrument, the profits and losses are subject to the usual deposit taxation. For the majority of German private investors, this corresponds to the flat-rate withholding tax of 25 percent.
Pros and cons: the planned holding period as an important criterion
Depending on the planned holding period and personal tax situation, both direct and indirect purchases can be beneficial for the investor. For example, if the investor wants to invest one part rather strategically and long-term and another part tactically and during the year, both forms are sometimes suitable.
While the taxation of financial instruments is strictly regulated in this country and is carried out automatically by the custodian bank, the wallet mainly involves administrative effort and uncertainties in the assessment bases. In the case of a direct crypto purchase via wallet, investors must specify the sale transactions in the income tax return themselves and can also prove them on request. This can quickly lead to calculation chaos. Although the first crypto platforms offer the possibility of exporting transactions, the individual calculation of capital gains (and losses) taking into account airdrops, staking rewards, savings plans and other special situations should not be underestimated. Although crypto tax programs promise a remedy, manual follow-up is often still required here, or the user has to set up and configure an API between the tax software and the wallet provider himself.
Comparing the costs
The direct trading of cryptocurrencies via wallet is characterized above all by the transaction costs, whereas in the case of a bank deposit, product costs are added to the transaction costs. In addition, there are other cost components, such as the spread (difference between bid and ask price), or fees, for example, to transfer liquidity from the current account to the wallet.
The hot wallet user usually has no running costs for the wallet, with a cold wallet there may be acquisition costs. The first costs are often incurred only when the user wants to transfer liquidity (fiat currency) to the wallet provider. Depending on the provider, zero to three percent of the amount of money will be withheld.
Afterwards, the wallet user is prepared for crypto trading, but should pay attention to the difference between the buy and sell prices and the market price. Some platforms show the market price and suggest a fee on it, others are guided by the market price and offer a slightly higher rate for the purchase and a slightly lower rate for the sale. In addition, there are also crypto platforms, mostly crypto exchanges, which set the current market price and only charge a variable or fixed fee for each transaction.
In contrast, the normal custodian usually pays an ongoing fee for his account details. For the purchase and sale of crypto ETPs, the bank then charges mainly a flat fee and / or a transaction fee depending on the volume. In contrast to the direct purchase, an issuer is still responsible for the administration and custody of the cryptocurrencies in the crypto ETP. Accordingly, most issuers charge a management fee spread over the year, which is fed directly from the ETP’s assets.