The simple and cost-effective investment in exchange-traded funds (ETFs) has become very popular. By passively mapping broad indices, such as the MSCI World, which covers over 1,600 shares of companies from industrialised countries, global markets become easy to invest in for private investors, but also for institutional investors, which results in the greatest possible risk reduction due to the broad diversification of the investment.
In times like these, however, even ETF investors are not immune to massive price losses. For example, the MSCI World lost over 30% in value with the outbreak of the coronavirus crisis. From the perspective of long-term investors, there is much to suggest that these losses will be recouped over a longer investment period. The loss-realising sale of equity ETFs and the permanent abandonment of investments in the equity market is certainly not a sensible way to pursue long-term, strategically oriented asset accumulation in view of the lack of attractive alternative investments.
Tax-efficient loss realisation
But is there perhaps a need for action from a tax perspective, or at least an attractive option for portfolio optimisation? Loss realisation, e.g. through the sale of ETFs, means that the losses incurred become relevant for tax purposes and the tax authorities can share in the losses. Losses from capital assets can generally be offset against other positive income from capital assets (e.g. dividend income, realised capital gains). For an investor who holds his fund units as private assets for tax purposes, this means that 26.375% of the losses can be reimbursed by the tax authorities in the form of an offsetting tax credit. Losses that cannot be offset can also be carried forward to later years. Loss realisation by way of ETF disposal can therefore make sense from a tax perspective. It should be noted that in the case of losses from the sale of fund units, even if these are equity funds, neither the loss offsetting restrictions for losses on the sale of shares (so-called share loss pot pursuant to Section 20 (6) sentence 4 EStG) nor the loss offsetting restrictions recently introduced by the legislator are used for forward transactions.
100% loss realisation on disposal of certain synthetic replicating ETFs
Gains from the sale of fund units are tax-exempt for private investors at 30%, provided the fund is an equity fund; for taxable institutional investors, the gains from the sale of fund units are tax-exempt at 30%. Partial exemptions even 80% for corporation tax purposes. However, the prerequisite for this is that an equity fund must have more than 50% of its assets actually physically invested in shares. In the opinion of the tax authorities, a fund that only invests economically in equities and which only replicates a certain equity risk derivatively (so-called synthetic replication, e.g. via so-called total return swaps) does not benefit from the partial exemption at investor level. Swap equity ETFs that invest the money collected from investors, e.g. in German government bonds (so-called carrier portfolio) and transfer the performance of an equity index (e.g. DAX, MSCI World, Nikkei) to the fund via a total return swap (exchange of the return on the German government bonds for the equity index performance with the swap counterparty) are therefore not eligible for partial exemption, even though they are equity funds in economic terms.
Investors can take advantage of this tax disadvantage of synthetically replicating ETFs in the current loss situation. Losses from the sale of equity funds without partial exemption privileges can be utilised for tax purposes by the investor at 100%, which increases the tax relief effect accordingly.
ETF investors should therefore take advantage of the current situation to organise their ETF portfolio more efficiently for tax purposes by substituting ETFs that do not qualify as equity funds for tax purposes with ETFs that physically invest in equities. This achieves 100% tax recognition of current losses and at the same time creates the basis for subsequent increases in value to benefit from the attractive partial exemptions.
Yours TAXGATE Team will be happy to provide you with further information at any time.
