Tax tip: Losses from forward transactions

Investors who enter into futures transactions such as contracts for difference (CFDs) and options, but not warrants and certificates, have had a particular problem since 2021. This is because they are only allowed to offset losses from such transactions up to €20,000 per year and only against corresponding gains from futures transactions.  Investors can now draw hope, as the Rhineland-Palatinate Fiscal Court (Ref.: 1 V 1674/23) doubts the constitutionality of the provision.

Background: Forward transactions are financial instruments that are to be fulfilled with a time delay and whose value is derived from an underlying asset. This allows investors to participate in the price changes of shares, currencies or commodities or to hedge against losses.

In the current case before the tax court, the investor realised profits of 100,000 euros and losses of 90,000 euros from forward transactions in the year in dispute. Despite a total profit of 10,000 euros, the tax office only recognised losses of 20,000 euros and assessed taxable income of 80,000 euros, on which a tax of around 20,000 euros was to be levied. The remaining losses only have a tax-reducing effect if sufficiently high profits and low losses are realised in subsequent years.

The plaintiff appealed against this and was initially successful, but so far only provisionally, as a final judgement has not yet been issued. The court suspended the enforcement of the tax assessment until a decision has been reached on the main issue, as there are serious doubts as to the constitutionality of the restriction on loss offsetting for forward transactions.  Against the background of proceedings before the tax courts, some of which have lasted for years, the plaintiff is now avoiding having to pay taxes that significantly exceed his actual profit.

With the decision, there are now constitutional doubts about a further restriction on the offsetting of losses under the flat-rate withholding tax. Some time ago, the Federal Fiscal Court already considered the non-limited offsetting of share losses only against share gains to be constitutionally dubious and referred the case to the Federal Constitutional Court. Since then, the tax authorities have issued provisional tax assessments in this regard.

Investors with similar constellations should consider an appeal against their income tax assessment and, if necessary, apply for a suspension of enforcement.