Losses from equity funds

There is good news for fund investors: the Federal Fiscal Court has ruled that certain losses from equity funds can be offset against gains in full, rather than just in part. However, this is subject to the condition that the loss arose solely as a result of changes to the taxation of fund units with effect from 1 January 2018 (case numbers VIII R 15/22 and VIII R 22/23, judgements of 25 November 2025).

The background to this is as follows: the 2018 tax reform brought about a fundamental change in the taxation of fund units. Since then, the so-called ‘partial exemption’ has applied to equity funds that consistently invest more than 50 per cent of their assets in shares. As a result, 30 per cent of all distributions, advance lump-sum payments and capital gains are tax-free for private investors. Conversely, however, 30 per cent of any losses incurred are also disregarded. In order to clearly distinguish between the different rules applicable before and from 2018 onwards, fund units were treated as having been fictitiously sold at the end of 2017 and fictitiously reacquired at the start of 2018. The partial exemption therefore applies exclusively to the performance of the units from 2018 onwards.

Put simply, the cases now decided were based on the facts that an investor had acquired units in an equity fund in 2017. Under the 2018 tax reform, the movement in the unit price resulted in a notional capital gain of 100 euros for the investor by the end of 2017. 

At the end of 2018, the investor actually sold the units and incurred a notional loss of 100 euros for the period from the start of 2018 until the actual sale. Because the gain had to be taken into account in full up to the end of 2017, whilst the loss from 2018 onwards was only recognised at 70 per cent due to the partial exemption, this resulted in a total taxable gain of 30 euros, even though, from an economic perspective, the investor had not actually realised any gains at all from the start of 2017 to the end of 2018.

In its judgements, the Federal Fiscal Court has now clarified that the partial exemption does not apply to that part of the loss incurred from 2018 onwards which offsets the profit generated during the holding period up to the end of 2017. In the court’s view, this portion of the loss incurred from 2018 onwards must instead be taken into account in full for tax purposes. Only any loss exceeding this amount, which is economically ‘genuine’, is subject to the partial exemption. 

If the notional loss from 2018 until the actual disposal had amounted to 200 euros, 100 euros of this would have been fully deductible, whilst only 70 per cent of the remaining 100 euros could have been taken into account. The principles of the judgement should therefore also apply to other types of funds, such as mixed and property funds. However, this does not apply to existing units acquired before 2009, which are protected under grandfathering provisions.

Investors must now check for themselves whether such a profit-and-loss scenario applies to them and, if necessary, request a correction to their tax return for the year of disposal. As the tax authorities have not yet commented on the ruling, the custodian banks will not, at present, make any automatic corrections.