The draft bill will still need to be discussed in parliament and could be passed as early as next spring. It only targets top athletes, supported by state funds and on the national anti-doping agency's test pool and does not affect amateurs.
Doctors or other individuals, procuring the substances, could face jail terms of up to 10 years as the entourage of the athletes is also moved more into focus.
German sports officials welcomed the tougher sanctions included in the draft, saying fear of prison would be a major deterrent for doping offenders.
Several other European nations, including Italy, Spain and France, have already passed similar laws.
"We are happy that a specific proposal is now on the table," Alfons Hoermann, head of Germany's Olympic Sports confederation (DOSB) said on Wednesday. "What the government does is going into the right direction. We welcome this."
Germany has had several big name athletes admit to doping or caught using banned substances in recent year including cyclists Jan Ullrich, Stefan Schumacher as well as biathlete Evi Sachenbacher-Stehle, who tested positive at this year's Sochi winter Olympics.
"I fully support it if we take it seriously," Oliver Bierhoff, team manager of Germany's national football team told reporters. "It is important for an athlete to say they have a responsibility and risk going to jail (if they dope).
"Only with such drastic measures can we achieve having a clean sport."