News on the taxation of trading in shares and derivatives - There is still some good news regarding the taxation of capital gains

Legislators have been critical of investors for many years and regularly come around the corner with more stringent regulations (see, for example: TXGT blog from 29 January 2020 on the restriction of the deductibility of capital losses and see no. 2 below). Case law has already put a stop to this tax administration practice in numerous cases (cf. for example: TXGT news from 26.03.2021 on the tax liability of bonus shares, TXGT-News v. TXGT news from 08/03/2016 on the expiry of options).

However, two pieces of good news were published last week that we would like to draw your attention to:

1 BFH considers the loss set-off restriction for losses on the disposal of shares to be unconstitutional

With the introduction of the flat-rate withholding tax on 1 January 2009, the legislator had already created two loss offsetting pots: Share losses (so-called bad loss pool) can only be offset against share gains, while other losses (so-called good loss pool) can be offset against all capital gains. This separate offsetting of losses was justified with the aim of "preventing share speculation transactions that could lead to abstract budgetary risks" (cf. BT-Drs 16/5491, p. 19).

In a ruling dated 17 November 2020 (case no. VIII R 11/18), the highest German tax court has now referred the question to the Federal Constitutional Court as to whether it is compatible with the principle of equality if losses from the sale of shares can only be offset against gains from the sale of shares. The Federal Fiscal Court (BFH) is convinced that this regulation violates the constitutional principle of equality. In the opinion of the court, there is no plausible economic reason for the legal disadvantageous treatment of share losses (no danger of significant tax losses due to qualified budgetary risks; no prevention of abusive arrangements, etc.).

Taxpayers are now faced with the question of how they should deal with this development. The share loss pot is held by the custodian bank, at least for domestic customer relationships, and is not determined separately as is the case for foreign customer relationships. Investors with foreign custodian banks and a share loss pot with otherwise positive capital income should keep their tax assessment open until the decision of the Federal Constitutional Court and lodge an appeal against the restriction on loss offsetting. Investors with domestic custodian bank must first contact their custodian banks and apply for a separate loss certificate within the meaning of Section 43a (3) sentence 4 EStG. § 43a para. 3 sentence 4 EStG. In this case, the share losses can no longer be utilised at custodian bank level, but can be taken into account in the tax assessment procedure.

As a result, investors with a domestic custodian bank should check on a case-by-case basis what is of more use to them: the share loss pot at custodian bank level for offsetting against future share gains or the share loss pot in the investment procedure in order to request offsetting against other capital gains.

2. current BMF circular (withholding tax decree) with important additions on trading and the new loss set-off restriction for forward transaction losses

In addition to the above-mentioned, probably unconstitutional, loss set-off restriction for share losses, the legislator has recently recognised the needto introduce further, significant loss set-off restrictions for certain investments, the unconstitutionality of which will certainly also have to be reviewed by the highest court. This concerns (i) losses from forward transactions (Section 20 (5) sentence 5 EStG, "Forward transaction losses") and (ii) losses from the full or partial uncollectibility of a capital claim or from the derecognition, default or transfer of worthless assets (section 20 (5) sentence 6 EStG, "Default losses"). In both cases, the annual offsetting of losses and the loss carryforward is limited to EUR 20 thousand per annum. These considerable offsetting restrictions caused great concern within the rapidly growing trader community and triggered intensive discussions regarding possible adjustment reactions (e.g. the use of a so-called "tax relief"). Trading GmbHs, relocation etc.).

In the case of forward transaction losses, the offsetting option is also limited to forward transaction gains/tilting premiums, while default losses can be offset against all investment income. The question of the distinction between forward transaction losses and default losses associated with the choice of investment or trading instrument is therefore very important in practice. On 3 June 2021, the tax authorities issued a statement on this issue, among others, as part of an amendment to the withholding tax decree. The main statements can be summarised as follows

• • • Warrants and certificates (e.g. knock-out certificates, turbos, etc.) are none Forward transactions; a total loss from such a financial instrument therefore qualifies as a default loss and not as a forward transaction loss;
    • CFDs, (uncertificated) options, etc., on the other hand, are forward transactions, meaning that losses from such instruments are subject to the stricter regulations for forward transaction losses;
    • The sale of a worthless asset (and thus the incurrence of a limited offsetting loss) is generally assumed if the sale price does not exceed the actual transaction costs.

It should be noted that the limited loss offsetting for forward transaction losses and default losses does not take place at the level of the custodian bank. This means that these losses (e.g. from knock-out certificates from 2021) are neither included in the general loss pool nor in the equity loss pool at the bank for the purposes of capital gains tax deduction. There are also no further, separate loss offsetting pots for these losses at bank level. The investor must claim the (tax-reducing) loss offsetting in his tax returnalthough the tax on corresponding profits (e.g. forward transaction profits from CFD trading) is paid directly by the bank.

Dr Thomas Elser and Dr Tobias Stiegler are tax and capital market experts at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.