The German Cabinet has approved a bill that requires social networks like Facebook and YouTube to report hate speech to the police.
Social media companies are already required to delete harmful content in Germany within 24 hours.
The law extends to multiple forms of hate speech, including far-right propaganda, graphic portrayals of violence, murder and rape threats or posts indicating that someone is preparing a terrorist attack.
The distribution of child sexual abuse images is also covered under the bill.
Social media platforms that refuse to cooperate with the bill could face fines of up to €50 million.
"In the future, those who make threats or spread hate online will be prosecuted more toughly and more effectively," Justice Minister Christine Lambrecht said on her ministry's website.
The proposed bill would also extend the definition of criminal hate speech to include threats of rape or property damage and expressions of approval for serious crimes.
Crimes motivated by anti-Semitism will also result in increased sentences.
In a further measure, authorities will make it easier for politicians, volunteers, and journalists to prevent online users from accessing their home addresses from public registers.
Some local politicians in Germany have recently said they will not stand for re-election following threats and hate speech.
In January, "bullet holes" were left in the windows of an office belonging to German MP, Karamba Diaby, provoking widespread outrage.
The new measures still require the approval of Germany's Parliament but have not gone unopposed, where debate is fierce over online anonymity.
Germany has previously been criticised for his approach to tackling far-right extremism, with some suggesting laws focus "too much on symptoms rather than on the causes" of hate speech.
The new bill comes just days after 12 people were arrested for planning a right-wing attack, after communicating in part over online chat groups.
Legal experts estimate that there are more than 100,000 cases of hate speech in Germany each year.