CAPITAL GAINS TAX
IN GERMANY

When you sell financial assets, you may need to pay capital gains tax (CGT). Find out what it is, how it works in Germany, and what you need to know to navigate it as an investor.

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The process of investing can be relatively straightforward. User-friendly trading platforms provide a trusted way to deposit funds, choose assets to invest in, and buy them. However, after you have sold some or all of your shares, you may have to pay capital gains tax on any profits you make.

This guide can help you to navigate the process seamlessly and cost-effectively. It explains what German CGT is, how to calculate it, and how you can make sure that you pay no more than the legal requirement.

What is capital gains tax (CGT)?

In Germany, if you buy assets from capital marketsand make an income from them, or sell them for a higher price than that at which you bought them, you must pay capital gains tax (“Kapitalertragsteuer” or “KESt”) on any profits. The process in Germany is overseen by the Federal Central Tax Office.

In some other countries, a “capital gain”relates solely to the difference between the value at which you bought and sold an asset. In Germany, CGT is slightly more complex, as taxable income includes items such as dividends or interest received from an asset.

The amount of CGT you pay will depend on numerous factors, including the nature of the assets, your marginal tax rate, and where you live. Some regions of Germany will levy a Church tax (“Kirchensteuer“) on residents’ CGT obligations, and it is also important to consider the solidarity surcharge. The duration for which you have held an asset also impacts CGT, as it is applied at a more favourable rate in the case of long-term investments (investments held for over a year).

A capital loss refers to an investment where you sold an asset for a price lower than what you paid for it. While there is no CGT liability on capital losses, they still need to be considered, as capital losses can be offsetagainst other capital gains.

What assets have capital gains tax?

The scope of CGT for investors in Germany extends beyond just potential profits made from trading stocks and shares to encompass interest income [Glossary: The amount of interest earned on an asset], dividends [Glossary: A portion of a company’s profit that it pays out to shareholders, based on the company’s performance], capital gains and capital appreciation. 

While the following list is not exhaustive, capital gains tax is generally applicable to profits from the sale of:

• CFDs and other derivatives
• Securities
• Intangible assets
• Dividends
• Interest from banks and fixed-interest securities
• Distributions from investment companies
• Profit distributions from silent partnerships
• Certain life insurance contracts
• Gains from forward transactions
• Accrued interest on the sale of fixed-income securities
• Foreign investments

Certain investments fall outside the scope of CGT, including:

• Some assets, such as income from private and business loans
• Interest from mortgages and land charges
• Income from overseas accumulating funds
• Income from endowment life insurance policies concluded before  January 1, 2005, with a policy term of at least 12 years, may have lower or no CGT.

How does CGT impact my investments?

If you record a gain on an investment you will generate a CGT liability which needs to be paid. This means you will ultimately receive less overall investment income from that trade than you would if CGT didn’t apply. 

Some banks and investment firms might withhold any CGT due on an account and pay it directly to the tax office on an investor’s behalf. Even if this is the case, the reporting and payment of any CGT liabilities is ultimately the responsibility of each individual investor. 

It is also the responsibility of each investor to update tax authorities regarding any changes to personal circumstances which might influence their tax status and the CGT rate that should apply to their investments. 

How do I calculate my CGT?

Up to three separate tariffs go into formulating your CGT liability:

• The first is the national rate of CGT — 25% — which will apply to most people. 
• The second is a solidarity chargewhich is 5.5% of the CGT rate (1.38%). This increases the basic effective CGT rate in Germany to 26.375%.
• Finally, if you live in a region where Church tax applies, then the ultimate CGT rate will be further increased. 

If you want to calculate your CGT obligations yourself, there are three key stages to work through:

• Calculate your capital gain. To do so, work out the difference between the purchase and sale price of the asset plus any commissions or fees you paid. Do not forget to include income such as reinvested dividends.
• Confirm your CGT rate, taking into account the national rate and applying the solidarity surcharge and/or church tax if applicable.
• Establish how long you have held the assets. The standard rate of 25% only applies if your investment was held for more than one year (for movable assets) or 10 years (for real property). If you held the position for a shorter period of time, your individual progressive rate of tax will be applied.

To make things clearer, consider some examples. Taking the given rates of CGT, solidarity charge and variable Church tax rates, your effective CGT rate will likely be one of the below:

No Church tax	25% capital gains tax + 1.38% solidarity surcharge	CGT rate = 26.38% (solidarity surcharge only)
Church tax of 8%	25% capital gains tax + 1.38% solidarity surcharge + 8% Church tax	CGT rate = 28.38% (solidarity surcharge + 8% Church tax)
Church tax of 9%	25% capital gains tax + 1.38% solidarity surcharge + 9% Church tax	CGT rate = 28.63% (solidarity surcharge + 9% Church tax)

Before questioning the value of your investment efforts, consider the savers’ lump-sum allowance (“Sparerpauschbetrag”). This allowance, which is available to all German tax residents, allows a certain amount of investment gains before CGT is applicable. 

In each tax year, individuals can receive €1,000in profits on capital investments before CGT is applied. For married couples, the allowance is €2,000 annually.

To prevent CGT withholding at source, file an exemption order (“Freistellungsauftrag”) with your asset-holding institution. If you have multiple accounts with different agents, allocate your tax allowance accordingly.

How can I minimise my CGT burden?

While you may not be able to avoid paying capital gains tax entirely, there are some situations where you can minimise the amount of tax you pay each financial year:

Holding for at least 12 months

Look to invest in long-term investments rather than short-term trades. If you hold movable assets such as stocks for at least 12 months, or property for 10 years, the tax rate applied on any profits will be the standard flat rate of CGT (25%), rather than the potentially higher individual progressive rate.

Take advantage of capital losses

Not all trades are winners, but the good news is that you can use capital losses to offset your capital gains, as long as both investment events occurred in the same tax year.

Monitor your tax situation

The responsibility falls on individual investors to establish if the rate applied is correct, or to claim back any funds by completing a personal tax return.

Speak to a professional

A tax agent who specialises in investment taxation will be able to advise if there is potential to establish any ways that you might be able to reduce your CGT. They can consider your individual circumstances, and will be able to steer you towards sensible strategies to minimise your tax burden, while helping you to avoid the risk of taking an overly aggressive approach, which might violate the tax code.

Final thoughts

Capital gains tax is an integral part of the investment process. It is crucial that investors in Germany familiarise themselves with the way in which German CGT works, to comply with tax regulations and understand the options available to them to minimise their tax burden. 

Ensure that you conduct research, and if necessary, consult with a tax professional for expert advice.

Visit the eToro Academy to learn more about tax-efficient investing.

FAQs

I’m not religious, are there ways that I can avoid paying the Church tax?

German Church Tax applies to any German tax resident who has been baptised in the Catholic or Protestant faiths or belongs to the Jewish faith. If you make an official renunciation of your faith, you are no longer subject to Church tax. However, you would have to advise the financial institution and tax office of this change, as otherwise the Church tax will still apply.

How can I make the most of my Sparerpauschbetrag (savers’ lump-sum allowance)?

Your CGT tax-free allowance of €1,000 applies to each tax year and operates on a “use it or lose it” basis. If you have unrealised net profits that are greater than the €1,000 threshold, then staggering the closing out of the position so that it occurs over two tax years would allow you to use two different years’ worth of allowances and reduce your total tax liability.

Do all brokers automatically withhold CGT in Germany?

No. Not all brokers automatically deduct and report CGT on investments which are liable for German CGT. If your broker does not process the CGT reporting and payment, then you are responsible for declaring your capital gains tax in your annual tax return – Einkommensteuererklärung.

What is a “Freistellungsauftrag”?

A Freistellungsauftrag is a tax exemption order which investors can file with financial institutions to instruct an agent or broker to not automatically withhold German CGT on investment earnings up to a certain limit. This can avoid having to complete a personal tax return to reclaim CGT related income which falls below the tax-free personal allowance limit of €1,000 for individuals and €2,000 for married couples.