Which income is considered investment income?

With the introduction of the withholding tax, it is generally no longer necessary to submit the KAP form. However, in some cases you must still complete the KAP form:

• the capital gains are not subject to tax deduction (e.g. sale of GmbH shares of less than 1 percent)
• income from foreign accumulating investment funds
• income (interest, dividends, etc.) from foreign accounts or deposits
• interest from private loan agreements
• interest on tax refunds
• sale of endowment life insurance policies (for contracts concluded from 2005)

Note: For certain income, you must also complete the KAP-INV form (for income from investment income not subject to domestic tax deduction) or KAP-BET form (for income from capital assets in participations, if the income and the tax to be credited have been determined separately and uniformly).

Furthermore, the KAP form must be completed in the case of an optional assessment if:

• a loss carryforward from previous years is to be taken into account or a loss offset of income from capital assets is to be made, or
• the saver’s allowance has not been fully utilised, or
• church tax has not been deducted despite church tax liability, or
• foreign taxes are still to be taken into account, or
• to check the amount of the capital gains tax deduction.

If you wish to apply for a so-called favourable tax rate check, you must also complete the KAP form. This may allow you to benefit from a lower tax rate if your individual tax rate is lower than the withholding tax rate of 25 percent.

Losses from worthless shares in the case of pure account write-offs may be offset against income from capital assets, but there is a limit. Losses can only be offset against income from capital assets up to a maximum of 20.000 Euro. Unused losses are then carried forward to subsequent years. Important: In the case of worthless shares, the bank does not carry out a loss offset. It does not include losses in the loss pot. Losses from worthless shares must therefore be included in the tax return.

(2023): Which income is considered investment income?

When is it necessary to complete the KAP form?

With the introduction of the withholding tax, it is generally no longer necessary to submit the KAP form. However, in some cases, submission is still required:

• capital gains are not subject to tax deduction (e.g. sale of GmbH shares of less than 1 percent)
• income from foreign accumulating investment funds
• income (interest, dividends, etc.) from foreign accounts or deposits
• interest from loan agreements between private individuals
• interest on tax refunds
• sale of endowment life insurance policies (if taken out after 2005)

The KAP form must also be completed if one of the following points applies in the case of an optional assessment:

• a loss carryforward from previous years is to be taken into account or a loss offset of income from capital assets is to be made,
• the saver’s allowance has not been fully utilised,
• church tax was not deducted despite church tax liability,
• foreign taxes are still to be considered,
• the amount of the capital gains tax deduction is to be checked.

You must also fill in the KAP form if you wish to apply for a so-called favourable tax rate check. This may allow you to benefit from a lower tax rate if your individual tax rate is lower than the withholding tax rate of 25 percent.

Note: For certain income, you must also complete the KAP-INV form (for income from investment earnings not subject to domestic tax deduction) or KAP-BET form (for income from capital assets in the case of shareholdings, if the income and the tax to be credited have been determined separately and uniformly).

Losses from worthless shares in the case of pure account write-offs may be offset against income from capital assets, but there is a limit on the amount. Losses can only be offset against income from capital assets up to a maximum of 20,000 Euro. Unused losses are then carried forward to subsequent years. Important: In the case of worthless shares, the bank does not carry out a loss offset. It does not enter losses into the loss pot. Losses from worthless shares must therefore be included in the tax return.

(2023): When is it necessary to complete the KAP form?

Can I claim income-related expenses from capital assets?

With the deduction of withholding tax, the tax liability for capital gains is generally settled. This means that expenses related to earning income can no longer be considered as deductible expenses upon proof. They are covered by the saver’s allowance of 1.000 Euro for single persons and 2.000 Euro for married couples.

Actual expenses cannot be deducted even in the favourable tax rate test. If your personal tax rate is below 25%, you can apply for your capital gains to be taxed at your individual tax rate in the tax return under "Form KAP" and thus correct the deduction of withholding tax of 25% in your favour (so-called favourable tax rate test). However, even with this "optional assessment at the individual tax rate", it is not possible to claim expenses upon proof (BFH ruling of 28.1.2015, VIII R 13/13).

However, there is an exception for the "mandatory assessment at the individual tax rate": In some cases, income tax on capital gains is not settled with the capital gains tax deduction. Instead, the capital gains must be declared in the tax return and taxed at the individual tax rate. The withheld capital gains tax is then credited against the tax liability. In this case, the normal tax rules for deducting expenses apply. This means that expenses can be deducted in the proven amount, e.g. interest on debt. No saver’s allowance is granted for these earnings (§ 32d para. 2 EStG).

A mandatory assessment at the individual tax rate may apply for

• Capital gains that belong to other types of income, e.g. rental income or business income,
• Capital gains from the sale of shares in a corporation with a stake of more than 1%,
• Capital gains from shareholdings in corporations in business assets,
• Interest from so-called back-to-back financing,
• Interest from a corporation or cooperative to its shareholders,
• Interest from private loans between related persons (e.g. spouses) if the borrower uses the loan to generate income and deducts the interest as business expenses or income-related expenses. In this case, the interest income for the lender is not subject to the withholding tax rate of 25% but is taxed like other income at the personal tax rate (§ 32d para. 2 no. 1a EStG).

(2023): Can I claim income-related expenses from capital assets?

When are capital gains from shares tax-free?

Given the record prices, many shareholders are considering taking profits, following the classic investment rule "Only realised profits are real profits". The question arises: Does the state earn a share?

Yes and no, it depends on when the shares were purchased:

• Since 1 January 2009, a flat withholding tax of 25 percent plus solidarity surcharge and, if applicable, church tax generally applies to capital gains from securities. However, this only applies if the securities were purchased after 2008.
• However, if you sell "old holdings" that were purchased before 1 January 2009, you can receive the capital gains tax-free without limit.

There is a small consolation for shareholders who entered the market after 2008: They can offset taxable capital gains against losses incurred in the past from shares purchased after 2008. And as long as the saver's allowance of 801 Euro/single (1.602 Euro/married) per year is not exhausted, investors can also receive capital gains from shares purchased after 2008 tax-free.

Also important to know: The "first in, first out" rule applies to the calculation of capital gains. This means: If an investor has purchased shares in a company several times and sells part of them, the tax office considers the shares bought first to be the ones sold first.

(2023): When are capital gains from shares tax-free?

Are the costs of a voluntary disclosure deductible as income-related expenses?

Between 2010 and 2014, over 100,000 voluntary disclosures regarding undeclared capital income from Switzerland were submitted. Those affected by voluntary disclosure face two issues: firstly, the conditions for the effectiveness of immunity from prosecution are extremely complicated (see Uli Hoeneß), and secondly, the costs for the disclosure, i.e., for obtaining documents and for the tax advisor, are extraordinarily high.

The question is whether the high costs can be deducted as income-related expenses for income from capital assets.

• In principle, since the introduction of the withholding tax in 2009: Expenses related to capital income can no longer be deducted as income-related expenses for income from capital assets upon proof. All expenses are covered by the saver’s allowance. According to the tax authorities, the prohibition on deduction should also apply if the expenses are related to capital income from years before 2009 (BMF letter dated 9.10.2012, BStBl. 2012 I p. 953, para. 322).

The Federal Fiscal Court has confirmed that tax consultancy costs in connection with a voluntary disclosure for capital income from 2002 to 2008 cannot be deducted as income-related expenses in 2010. Although the costs for the tax advisor are income-related expenses for income from capital assets, they can no longer be deducted as such from 2009 onwards. Only a saver’s allowance of 801 Euro is now taken into account (BFH ruling of 2.12.2014, VIII R 34/13).

(2023): Are the costs of a voluntary disclosure deductible as income-related expenses?

What you can deduct for tax purposes in the event of capital losses

A loss of capital can occur not only due to falling prices but also through the total loss of the investment due to the debtor's insolvency. If, for example, a loan is lost in this way, the loss should be deductible as negative income from capital assets, as any increase in assets from other types of capital claims through sale, redemption, or repayment must be taxed as capital income in accordance with Section 20 (2) No. 7 EStG.

The tax authorities long refused to recognise losses due to bad debts as tax-deductible.

However, the tax courts of Lower Saxony and Rhineland-Palatinate have recognised a loss of capital claims. Since the introduction of the withholding tax in 2009, gains at the asset level from sales or redemptions are taxable as capital income. This is to ensure that all increases in value are fully recorded. However, this also means that decreases in assets are recorded. Unlike in the past, there is no longer a distinction between income and asset levels. Therefore, realised changes in the value of the investment are tax-effective, both increases and decreases in assets (Lower Saxony FG of 21.5.2014, 2 K 309/13; FG Rhineland-Palatinate of 23.10.2013, 2 K 2096/11, confirmed by BFH ruling of 12.5.2015, IX R 57/1313 and BFH ruling of 24.10.2017 (VIII R 13/15).

TIP: If you suffer a total loss due to the insolvency of the issuer, claim the loss, i.e. the acquisition costs of the investment, in your tax return with a strong minus sign as negative income. If the tax office refuses to offset it against other capital income, file an objection to the tax assessment and refer to the BFH rulings of 24.10.2017 (VIII R 13/15) and 12.5.2015 (IX R 57/13).

One particular point you need to know: If a total loss is realised from 1.1.2020, the offsetting of losses is limited to 20,000 Euro per year. Unused losses can be carried forward to subsequent years and offset against income from capital assets up to 20,000 Euro each year (Section 20 (6) sentence 6 EStG).

This applies to the irrecoverability of a capital claim, the write-off of worthless securities, the transfer of worthless securities to a third party, or other loss of securities. The regulation is also intended to cover disposal transactions carried out for tax planning purposes, particularly when the solvency risk has already been partially or fully realised (BT-Drucksache 19/15876 of 11.11.2019).  

(2023): What you can deduct for tax purposes in the event of capital losses

Church tax on capital gains: Regulation since 2015

On capital gains, banks deduct the withholding tax of 25% as well as the solidarity surcharge of 5.5% on the withholding tax. In addition, church members must also pay church tax. Until 2014, they had the option of having the church tax deducted at source like the withholding tax or having it assessed as part of the tax return. That's the theory. In practice, many investors do not exercise this option, with the result that no church tax is paid on the capital gains.

Since 2015, banks have automatically deducted church tax from capital gains and paid it to the tax office along with the withholding tax and the solidarity surcharge. To do this, they enquire once a year between 1 September and 31 October at the Federal Central Tax Office whether the customer was subject to church tax on the cut-off date of 31 August of the relevant year. In certain cases, enquiries outside this period are also possible, e.g. when a life insurance policy is paid out. The new regulation applies to capital gains received from 1 January 2015.

If you do not want the bank to know your affiliation to the Protestant or Catholic Church, you can object to the data query at the Federal Central Tax Office (so-called blocking notice). In this case, you do not participate in the automated procedure, so the bank does not deduct church tax on capital gains. You must lodge the objection by 30 June of the year if the blocking notice is to be taken into account for the regular query on 31 August of the year.

However, you must then submit the "Form KAP" to determine the church tax as part of the tax return. You should be aware that the Federal Central Tax Office forwards the blocking notice to your tax office, so it is easy for them to check whether the "Form KAP" is included with the tax return or whether you have submitted a tax return at all.

(2023): Church tax on capital gains: Regulation since 2015

What is recorded under income from capital assets?

On the following pages, you can indicate whether you have income from capital assets in the tax year. This includes, for example, interest or dividends from investment funds or shares. Your bank will provide you with a tax certificate (annual tax statement), from which you can obtain all the important data for entry on the following pages.

Details of your income from capital assets are still required in the KAP form if, for example:

• the capital gains have not been subject to tax deduction
• you wish to have the tax deduction reviewed in terms of its basis or amount,
• you are liable to pay church tax and have received capital gains from which capital gains tax but no church tax was deducted.

In this case, enter all capital gains received. Lohnsteuer kompakt will then automatically apply for a favourable tax treatment for all capital gains.

(2023): What is recorded under income from capital assets?