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Anyone who receives a loan must repay it at some point. If they are unable to do so, the question arises as to how the loss for the lender should be assessed for tax purposes. The Federal Fiscal Court recently dealt with this issue by deciding whether the loss from the loan leads to negative income from capital assets, even if the original loan was granted before January 1, 2009. The background to this is that only since January 1, 2009, with the introduction of the 25% flat-rate withholding tax, has all capital income been taken into account for income tax purposes - including negative income from a loan loss.

Ruling of the Federal Fiscal Court: Loan losses before and after 2009

In the case in question, the loan has indisputably become irrecoverable, meaning the lender will not get the money back. In a recent ruling from June 18, 2024 (case reference: VIII R 25/23), the Federal Fiscal Court deemed the loan loss to be a so-called "non-taxable transaction", as the original loan was granted before 2009. If the loan had been granted after 31 December 2008, the full or partial uncollectibility of the loan receivable would lead to a capital loss to be recognized for tax purposes (section 20 (2) no. 7 of the German Income Tax Act). 

Irrecoverability and practical problems with private loans

However, in the opinion of the tax authorities, a loan is only deemed irrecoverable if insolvency proceedings have been rejected due to a lack of assets. In practice, this causes problems when loans are granted to family or friends and the borrower gets into financial difficulties. In such cases, there is often no other option but to waive the loan, as the initiation of insolvency proceedings among family or friends is the exception rather than the rule.

Gift tax and private loans

It should be noted that a loan waiver constitutes a gift that can trigger gift tax. If there is no family relationship, the tax-free amount is only 20,000 euros. Incidentally, a gift also exists if the interest rate is too low compared to the market interest rate. In this respect, private loans should be reviewed regularly.

Der KPMG Steuertipp