Exclusive FNG… FNG has learned that Germany will reverse a 2020 tax law that kept many German retail traders out of the CFD trading market – and which is expected to attract many more German retail clients to CFD brokerages.
Germany CFD tax background
In late 2020, the German Bundestag passed the Annual Tax Act 2020 which – among other things – limited the amount of CFD trading losses a trader could offset (for capital gains tax purposes) against profits to €20,000 per year. Germans are taxed on securities trading profits (and other capital gains) at around 25%.
So, for example, under the old law passed in 2020, if a trader did his/her accounting at the end of the year and had some trades that made money – say totaling €1 million – and some other trades that lost money money – e.g. totaling €600,000 – the merchant will be liable to pay a tax of €245,000. That is, only €20,000 of the losses could be set off against €1 million in profits before the 25% tax rate applied. This would eat up more than half of the trader’s “real” €400,000 in profits for the year.
If a trader were to ‘break even’ on his or her trading in one year, say with €1 million in profits and €1 million in losses in other CFD trades, they would still be liable to pay the same capital gains tax of €245,000 for that year year, and will end up losing a lot of money.
This punitive tax regime has kept many German retailers on the sidelines for the past four years, although some have found a way around the rules, either by registering as professional traders or by trading through corporate entities, which are taxed differently from individuals without the limitation of damages.
Damage compensation limitation removed
FNG has learned from various sources in Germany that the country’s ruling coalition has now agreed to completely remove the €20,000 loss coverage limit on all futures trading, including CFDs. The change will be retroactive to 2020 – meaning anyone who actually falls under the punitive rules will be able to claim a tax refund, fully applying losses against any gains made in 2021, 2022 or 2023.
The new proposal still needs to be approved by the Bundestag and passed into law, but initial reports from Germany say this is “highly likely” to happen before the end of 2024.
German CFD market
Germany has the largest economy in Europe with a GDP of around $4.1 trillion (the UK is second at around $3.1 trillion). And with a population of nearly 84 million, Germany is the continent’s most important CFD trading market. So the tax changes could have a significant impact on CFD brokers’ plans for 2025 and beyond, as many German retailers are likely to return to the market.
One broker that has been ahead of the curve is UK/Bulgaria-based online broker Trading 212, which this summer acquired German CFDs broker FXFlat, as exclusively reported at the time here on FNG. Trading 212 paid around €4 million for FXFlat, as was also exclusively revealed by FNG when we reported on Trading 212’s latest financial results.
FNG spoke to Jens Chrzanowski, Germany Branch Manager at XTB, one of the leading retail FX and CFD brokers serving the German market, who observed
“The CFD market in Germany, including all CFD brokers, felt the effects of the limited loss offset with a slight delay. After years of growth, turnover declined significantly. Many experts believe that overturning this practice, which is considered unconstitutional, will lead to an increased appreciation of the potential of CFDs as an effective investment tool. Consequently, investors in Germany are expected to be active in this sector again, especially given the increasingly turbulent nature of the markets in general.
“Finally, we support the idea of ’Fair Play’, even in taxation. Many experts believe that it was unfair to distinguish between CFDs and other instruments of leverage such as warrants or leveraged certificates in terms of taxation.”
We will continue to follow this story as it develops. Stay tuned to FNG…