cirBTC Swap Triggers Taxable Event, Resetting One-Year Holding Period

Circle, the issuer of the USDC stablecoin, has launched Digital Asset-Backed Borrowing (DABB), a lending function inside its business client portal. The process involves delivering bitcoin, which is then converted into cirBTC, a token that mirrors the deposited amount one to one. This token serves as collateral in the lending market of a third-party protocol, and USDC flows back from there to the Circle Mint account.

The conversion of bitcoin into cirBTC is considered a taxable event in Germany, resetting the one-year holding period for tax purposes. This means that if someone swaps their bitcoin into cirBTC, they will incur a gain or loss measured by the market value of their bitcoin on the day of the swap, and a fresh one-year period will start for the new token.

However, Circle's marketing around this product frames it as providing liquidity without triggering a taxable event. This reading is defensible under US tax law but does not carry over to German income tax law. Anyone who adopts this approach risks a tax bill on gains they could have realised tax-free earlier.

The question of whether swapping into a wrapper constitutes a taxable disposal has been addressed by the German Federal Ministry of Finance, which considers crypto assets as other assets within the meaning of Section 23 of the German Income Tax Act. The Ministry's letter sets out detailed record-keeping and cooperation duties for this type of transaction.

A dissenting view argues from economic identity: if you can swap back one to one at any time and carry the same price risk throughout, you have economically given nothing up. However, this view is not supported by a Federal Fiscal Court ruling deciding this question specifically for wrappers.