With the votes of the governing coalition (cf. BT-Drs. 19/15876, p. 50), the legislation has massively restricted the (annual) deductibility of capital losses and also created new loss offsetting groups.

The new Section 20 (6) sentence 5 EStG - losses from forward transactions from 2021

With the Tax Relief Act of 24 March 1999, private individuals were taxed for the first time. Forward transactions fully recognised for tax purposes. Since this new regulation at the latest, there has been a debate between taxpayers and the tax authorities as to how, for example, the expiry of such securities products should be treated for tax purposes. The BFH had already put an end to this dispute in 2016 (cf. TXGT news from 08/03/2016) and such losses are recognised for tax purposes.

The legislator has now created a new regulation according to which losses from futures transactions can only be offset against gains from futures transactions and income from option writer transactions. In addition, the offsetting of losses is limited to EUR 10,000.

"Losses from capital assets within the meaning of paragraph 2 sentence 1 number 3 may only be offset against profits within the meaning of paragraph 2 sentence 1 number 3 and against income within the meaning of section 20 paragraph 1 number 11 up to an amount of EUR 10,000; sentences 2 and 3 shall apply mutatis mutandis with the proviso that losses not offset per subsequent year may only be offset against profits within the meaning of paragraph 2 sentence 1 number 3 and against income within the meaning of section 20 paragraph 1 number 11 up to an amount of EUR 10,000."

It is not clear from the wording of the law or the explanatory memorandum whether it should be possible to offset profits and losses above this limit during the year. As this amendment will not come into force until 2021, it is unlikely that the BMF will clarify this quickly.

The justification for this new restriction on loss offsetting appears highly questionable, especially as the regulation was introduced very late in the legislative process. The legislation probably aims to protect investors from the risk of losses from speculative investments (see BT-Drs. 19/15876, p. 68 below: "Losses from forward transactions are therefore taken into account in a special loss offsetting group in order to limit the investment volume and the resulting risk of loss for investors from these speculative investments.").

The new Section 20 (6) sentence 6 EStG - irrecoverability of capital claims and default of worthless securities from 2020

 "Losses from capital assets from the full or partial irrecoverability of a capital claim, from the derecognition of worthless assets within the meaning of paragraph 1, from the transfer of worthless assets within the meaning of paragraph 1 to a third party or from any other loss of assets within the meaning of paragraph 1 may only be offset against income from capital assets up to an amount of EUR 10,000; sentences 2 and 3 apply mutatis mutandis with the proviso that losses not offset may only be offset against income from capital assets up to an amount of EUR 10,000 per subsequent year."

With this regulation, the legislator intends to overwrite another established case law (cf. inter alia. Stiegler, Rhineland-Palatinate tax court on the derecognition of shares that have become worthless, NWB Erben + Vermögen 3/2019 p. 108).

According to this new regulation, losses from

  • full or partial irrecoverability of a capital claim,
  • the derecognition of worthless assets or
  • any other loss of assets

can only be offset against other income from capital assets up to an amount of EUR 10,000. Losses that have not been offset can also be carried forward to subsequent years and offset against other income from capital assets up to an amount of EUR 10,000.

In the opinion of the legislator, this regulation is justified by the fact that investors with higher assets typically generate current income on a larger scale and are favoured by the flat-rate withholding tax of 25%. This fails to recognise that even an investor with higher assets typically The company wants to realise profits with its investment decisions and is severely affected economically by defaults.

What are the consequences of the new regulations?

  • Investors should prepare for these stricter rules in good time and keep appropriate documentation on hand. This is because the regulations may have to be implemented in the assessment procedure for tax returns, especially for foreign custody accounts.
  • The new restrictions can hardly be justified in the flat-rate withholding tax system. Depending on the extent of the resulting additional burdens for taxpayers, legal remedies should therefore be considered.
  • Banks, asset managers and family offices should inform their clients about the new regulations in good time and adjust their terms and conditions if necessary. In the statement of income, either considerable additional work will be required to record the affected transactions in accordance with the law or investors must receive corresponding information on their custody account statements.

Your TAXGATE team will be happy to support you in the tax-efficient implementation of investment strategies for both private and institutional clients

Dr Tobias Stiegler, Tax consultant at TAXGATE is an expert with many years of experience in investment tax law and international tax law.