Sebastian went missing on July 1 on the tiny North Sea island of Amrum for three days. His body was found on July 4 on a beach under 1.5 metres of sand, sparking suspicion.
But after further investigation local police said on Tuesday that he had been digging a hole in the sand when the sides fell in and suffocated him, daily newspaper the Süddeutsche Zeitung reported.
Sebastian, who had come on holiday from Austria with his family, had managed to dig a hole over one metre wide.
When the sides collapsed Sebastian would have lost consciousness quickly before suffocating, said the paper.
Police had mobilised helicopters, boats, and tracker dogs in their three-day search for the boy, who went missing from a "pirate ship" playground on the island off the coast of the German state of Schleswig-Holstein.
"A holiday photo showed where the boy was last digging in the sand," police spokesman Matthias Glamann said. Police then dug at that spot and found his body.