What is tax loss sale
Loss offsetting: How to save taxes
Investors like to invest in stocks and rely on price gains. But this tactic doesn't always work. After all: exchange rate losses can be used for tax purposes. And not only that: In principle, losses can be offset against profits within the framework of loss offsetting. However, there are a number of regulations to be observed that prevent unlimited loss offsetting. We give an overview:
Calculate profit or loss
First of all, you need to calculate your profit or loss. You can deduct certain expenses from the proceeds and thus reduce the taxable profit or increase the loss. The calculation looks like this:
- Selling costs (such as bank charges)
- Acquisition cost
- Incidental acquisition costs (such as processing fees)
= Capital gain
Loss offsetting pots at the bank
Every investor has three loss offsetting pots at their bank:
- Losses on stocks
- Losses from capital assets (excluding shares)
- Foreign withholding tax
In the following, we will go into detail on the loss offsetting pots.
1. Losses on stocks
If you have sold shares at a loss, you can only offset the capital losses against profits from the sale of shares in the same year or in the following years. Losses cannot be offset against dividends or interest. This procedure is called "horizontal loss compensation", since losses can only be compensated within the same income type.
If the losses are higher than the profit, the so-called loss carryforward will help you. The losses that could not have any tax effects are then offset against future profits.
Important: At the end of 2019, the legislature passed new regulations on the tax treatment of offsetting losses from forward transactions. Some of these have been in effect since January 1, 2020 and bring investors disadvantages with regard to tax. You can find out more about this in our article Losses from futures: That is changing.
By the way:
Anyone who holds their shares in the event of price losses, i.e. not selling them, cannot claim the price losses against tax. Losses can only be entered in the tax return if shares were actually sold at a loss.
Loss offsetting is usually done by your bank or financial institution for you without you having to worry about it: no withholding tax is withheld from positive investment income until the losses have been balanced out.
However, if you have invested your money with several banks, you have to take action yourself: Let's assume that you have invested your money with several financial institutions. One of your investments is a losing proposition for you, the other you make a profit. Then you need to request a certificate of loss from your bank with which you hold the loss-making investment. Attach this certificate to your tax return. The tax office will deduct the loss from your profits, thereby reducing the taxable profit.
2. Losses on capital assets
If you have losses from capital assets that are not a loss of shares - this includes, for example, losses from bonds or participation certificates - you can offset these losses against all positive investment income. In this case, you can also offset your losses against interest or dividends, but not against your other positive income, for example from renting and leasing.
3. Foreign withholding tax
In the case of financial investments abroad, a foreign withholding tax arises depending on the double taxation agreement. Your bank adds up the foreign withholding tax in this offsetting pot, as the non-recoverable part of the withholding tax has a reducing effect on the flat tax.
Married couples must bear this in mind when setting off losses
If you and your spouse have individual custody accounts or individual accounts at a bank, losses can be offset between these accounts and custody accounts. However, you have to submit a joint exemption order for this. If you missed that, all you can do is file a tax return.
By the way:
If you have suffered losses and are therefore unsure about your tax return, come to us, the VLH. Our advisors are happy to be there for you. Find a counseling center near you here: Consultant search.
This is an editorial text from the VLH editorial team. There is no advice on topics that are outside the tax advisory powers of an income tax aid association. Consulting services in specific individual cases can only be provided within the framework of the establishment of a membership and exclusively within the advisory authority according to § 4 No. 11 StBerG.
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