German investors trading derivatives can finally breathe a sigh of relief as lawmakers plan to repeal a punitive tax rule on CFDs. The country’s ruling coalition is set to repeal the regulation, which
restricted traders from offsetting losses against profits up to a certain
limit.
The €20,000 loss offset limit impacted the tax
liabilities of CFD brokers. Germany’s Traffic light coalition has now agreed to
abolish this rule, retroactively applying the change to 2020, several local
media outlets reported.
Fairer Tax Treatment
This decision could mean substantial refunds for those
affected, finally allowing traders to fully offset their losses against gains
from past years. The controversial €20,000 loss offset limit was introduced as
part of Germany’s annual tax laws.
Under this rule, investors could only deduct losses
from futures transactions, including CFDs, against profits up to the capped
amount. Many traders, particularly those dealing with volatile markets like
CFDs, were affected by this rule.
This repeal is expected to particularly benefit CFD
traders, as CFDs are considered forward transactions
under German tax law. Efforts to repeal this law have been in motion since
June 2022, when the Federal Fiscal Court deemed the loss limit
unconstitutional.
The court ruled that the €20,000 cap violated
principles of equal treatment, as it unfairly limited traders’ ability to offset
their losses. Last year, the ruling coalition, led by the Free Democratic Party, formally committed to reversing the rule.
Commenting about the latest development, Jens Chrzanowski, the Director of XTB Germany, said: “The new taxation law applies to CFDs and eliminates the
difference between CFDs and other leveraged instruments. As a result, all of
them are now treated equally when it comes to taxation. The impact on CFD
brokers was significant although it came with some delay. Looking at the data
from Germany’s CFD association, the drop in the CFD trading volumes reached
over 60% in Q1 2023 compared to Q1 2022.”
What This Means for CFD Traders
CFD traders will now benefit from offsetting losses without a restrictive cap. They can apply losses from 2020, 2021, and
2022 against any profits they made during those years. Additionally, this repeal will affect future
transactions. Germany’s decision to align its tax policy more closely with the
realities of derivatives trading could make the country more attractive for
investors in these instruments.
According to a report by Finance Magnates, the tax regulation was pushed almost secretly through the Bundestag during the 2020
Christmas holidays. The proposal was reportedly first introduced and then
passed more than a year ago.
It limited investors’ ability to subtract losses above the capped threshold from capital gains or any other positive income. Losses not offset can be carried over to subsequent years, but the limitation on
the amount still applies.
This article was written by Jared Kirui at www.financemagnates.com.
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