The tax treatment of losses from capital investments remains an important topic for investors. The particular focus continues to be on sec. 20 (6) sentence 4 of the German Income Tax Act (EStG), under which "losses from the disposal of shares may only be offset against gains from the disposal of shares". This restriction has been the subject of controversy for years and led the Federal Fiscal Court (Bundesfinanzhof, BFH) to stay proceedings and refer the question to the Federal Constitutional Court by order of 17 November 2020, case no. VIII R 11/18. According to the website of the Federal Constitutional Court (2 BvL 3/21), the decision is due to be handed down this year.

For taxpayers, this is relevant above all because losses on shares can only be offset against gains on shares, and not against other positive investment income such as interest or dividends. The provision therefore results in a stricter tax treatment of losses on shares than for other capital investments. Whether this differentiation will withstand constitutional scrutiny remains open.

The particular question is whether the qualified budgetary risks which, according to the explanatory memorandum to the legislation, abstractly threaten to materialise actually exist at all: offsetting losses from disposals of shares against other positive investment income is said to entail the risk of significant shortfalls in tax revenue in the event of substantial market slumps. Given its responsibility for public budgets that comply with constitutional requirements, the legislator is therefore said to be entitled to guard against the speculation-related risks to public budgets associated with the stock markets by introducing a special restriction on the offsetting of losses (Bundestag printed paper 16/5491, p. 19).

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Rules already amended for forward transactions and worthless securities

Irrespective of the decision on the offsetting of share losses, further restrictions on the offsetting of losses for tax purposes have already been amended by the legislator itself. For a time, losses from forward transactions as well as losses from worthless capital claims and comparable worthless securities were likewise subject to a heavily restricted ability to be offset. These provisions were repealed in their entirety for all open cases by the Annual Tax Act 2024 (Jahressteuergesetz 2024), after the Rhineland-Palatinate Tax Court and the BFH had clearly expressed their doubts as to the constitutionality of these provisions, VIII B 113/23.

For advisory practice, it is important to distinguish between these categories of cases:

losses on shares continue to be subject to the special restriction under sec. 20 (6) sentence 4 EStG, whereas the very strict restrictions on the offsetting of losses from forward transactions and worthless securities have been repealed.

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Possible consequences of a decision by the Federal Constitutional Court

Should the Federal Constitutional Court declare the restriction on losses from shares to be unconstitutional, this could lead to a further opening up of the offsetting of losses. In that case, it is conceivable that losses on shares may in future also be offset more broadly against other positive investment income.

Until a decision has been handed down, however, the existing legal position applies. Tax assessment notices should therefore be reviewed carefully, in particular where losses on shares have been taken into account only in part or not at all. German banks in particular are instructed to implement the current legal position, i.e. the restriction on the offsetting of losses. Losses on shares are therefore allocated to a separate loss pot for shares (Aktienverlusttopf) and, within the respective banking relationship, are offset only against gains on shares.

Anyone who already had an eye on the offsetting of such losses in the event of a decision favourable to investors was able to report the losses on shares in their tax return by means of a so-called loss certificate (Verlustbescheinigung). To the extent that offsetting against gains on shares was not possible in the assessment, the declared loss on shares was recorded in a notice determining the loss (Verlustfeststellungsbescheid). It was then necessary to file an objection against the refusal to offset the losses on shares and to apply for the proceedings to be suspended, with reference to the proceedings before the Federal Constitutional Court.

At the beginning of 2022, the Federal Ministry of Finance directed that tax assessment notices in which the offsetting of losses from disposals of shares is in dispute be issued on a provisional basis in respect of the point at issue. Investors therefore do not need to file an objection against the relevant tax assessment notices (Federal Ministry of Finance circular of 31 January 2022, V A 3-S 0338/19/10006 :001). This note of provisionality is to be included in all income tax assessments for assessment periods from 2009 onwards in which a loss from capital investments within the meaning of sec. 20 (2) sentence 1 no. 1 sentence 1 EStG arising from the disposal of shares is determined pursuant to sec. 20 (6) sentence 3 in conjunction with sec. 10d (4) EStG, because an offset against other investment income is not possible under sec. 20 (6) sentence 4 EStG (formerly sec. 20 (6) sentence 5 EStG). Consequently, where the tax assessment notices contain such a note of provisionality, the tax offices will – in the event of a decision favourable to investors – amend the past tax assessment notices of their own accord.

Where, by contrast, the losses on shares are still held in the banks' loss pot, offsetting can only take place in the future in the event of a decision favourable to investors.

In the case of shares that have become worthless, however, the Federal Ministry of Finance made a surprising exception. A role is played here by the "old" loss pot for securities that have lost their value, such as bonds and shares. These losses were subject to the special offsetting rules, applying a cap of EUR 20,000. When these special offsetting rules were repealed (Annual Tax Act 2024), custodian banks were granted a deadline until the beginning of 2026 to adapt their IT systems. This is because total losses from transactions in shares must now be booked into the loss offsetting pot for shares. Where, for reasons of simplification, the custodian bank allocates such losses to the pot for "other losses" until its systems have been converted, this is to be accepted until the beginning of 2026 on the basis of the new Federal Ministry of Finance circular. In effect, therefore, custodians are permitted to offset losses from shares that have become worthless in full against other investment income. This is also intended to apply in the tax return – fortunate are those whose bank only converted its systems as of 2026.

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In brief

The offsetting of losses from capital investments for tax purposes remains inconsistent: while the rules on forward transactions and worthless securities have already been amended, the restriction on losses from shares remains in force and is constitutionally contentious. For clients, a careful review of each individual case therefore remains essential. We would be glad to assist you – get in touch with us!

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