How New Tax Law Could Kill CFDs, Derivatives Trading in Germany

German investors trading a variety of derivatives products are subject to new capital gains taxes following an amended law that was pushed almost secretly through the Bundestag during 2020 Christmas holidays.

The legislative proposal went initially unnoticed when it was first introduced and then passed more than a year ago. But, shortly after, it made a big noise as the new regulation drastically limits the ability of individual traders to offset their losses against profits they earn from derivative transactions.

Generally, retail investors’ net profits from financial transactions are subject to a withholding tax at an aggregate rate of more than 26%. And, a basic understanding of tax laws implies that losses can be offset in full against profits.

But, under a new blueprint for the tax, losses from such transactions can be offset up to only €20,000 euros effective January 2021. Investors are therefore not allowed to subtract the losses above this threshold from capital gains or any other positive income. Losses that have not been offset can be carried over to subsequent years, whereby the limitation on the amount still applies.

The loss carryforward would then be used up after 79 years at the earliest and the trader can only claim a €20,000 loss per year on the tax return.

Another side note… the stated €20,000 limit was increased in the last amendment from €10,000 in the previous version, but many publications are still mistakenly quoting the old threshold.

For the Sake of Brevity, the Effects Can Best Be Illustrated with the Following Example:

A retail trader realizes a total of €1 million in derivatives profits while incurred a total loss of €800,000 in the same year. According to old regulations, he will pay a tax levy of nearly €50,000 on just €200,000 as his total loss will be deductible. But, starting from 2021, he will have to pay a withholding tax of more than €250,000 on his gross profit of €980,000 because he is allowed to subtract only €20,000 under the new rules.

In this example, the trader pays levies that were higher than the net profit as his proceeds are fully taxed, but losses are only deducted to a limited extent. What’s worse, if the trader’s derivatives transactions yielded a net loss of more than €20,000 during a calendar year, he would still be liable to a significant tax burden even though he made an overall loss.

As a result, investors will certainly ask themselves whether they still want to trade such products in the future.

Scope of the New Law

The most important question here is which financial products are actually affected. There were a few comments or clarifications from German authorities about which derivatives would fall into the scope of the new rules. This is not clearly defined in the law and the designated instruments have not yet been finally named until now.

But, if this definition was not interpreted narrowly, not only options and futures but also leveraged products and almost all other derivatives would be affected. This means that some products that are particularly popular with retail investors would be listed, including contracts for differences (CFDs).

Finance Magnates spoke with experts from the financial sector and they mostly do not believe that the law should actually be interpreted that broadly. And various statements by German regulators do not suggest this, too. But, it is not impossible.

“Trading options contracts and futures contracts will be definitely affected. Currently, it is not clearly defined if CFD-trading is or will be affected. We have to wait for some lawsuits until things become clear in this regard. I expect that the current version of the law will be modified,” said Alexander Voigt, Founder and CEO at

Why Is It Bad?

The design of the new tax raises multiple issues. One of the prevailing facts in the tax literature is that the deductibility of losses does not depend on the success of the investment from which the losses derive. However, the new law gives no grounds as to why this principle should not apply when a derivatives trader incurs a loss as an integral part of his investment activity.

Additionally, the new rules leave small investors ill-equipped to mitigate risk or respond to volatile market forces and keep them from wreaking havoc on their finances. Today, and as retail brokers have significantly widened their offerings, CFDs, options, and futures are among the weapons in an average, retail trader’s arsenal.

Technically, to hedge requires you to make offsetting trades where a loss in one investment is reduced by a gain in another, and the actual profit is only achieved when the sum of the winning trades exceeds the sum of the losing ones.

However, this assumption could support the narrow interpretation of the new regulation as it turns the focus to some derivatives traders who manipulate tax loopholes to delay paying capital gains taxes. Practically, they enter offsetting positions, but simultaneously close out the losing side by the end of the year and let the winning side open until the next year. Thus, they book the losses while delaying paying taxes on any gains.

In other words, the bigger levy could only target certain practices in the options trading industry such as the wash sales and thus would only apply to traders who use certain systems, such as the so-called saddles and strangles strategies.

Meanwhile, even though the new law aims to decrease speculative trading, it is unclear whether this would be the case. Instead, it may only lead to distortions across asset classes. Since the tax is levied each time a profit is booked, it results in so-called tax pyramiding, further incentivizing the use of other assets that are more transaction-intensive but require fewer taxes.

Why CFDs Brokers Are Not Concerned?

Finance Magnates spoke to some compliance officers at BaFin-regulated FX brokers. Two takeaways we can conclude were that; many of them were unaware of these changes and asked for some time to check further on the matter. Others were unable to describe the exact consequences of the new rules, either on their business or to their clients, should the amended law take effect this year.

Even those who were aware of the updated German regulation seem unconcerned as they are exempt from the obligation to withhold taxes on behalf of taxpayers among their clients. In other words, affected clients will assume the primary responsibility for reporting their taxable income. In addition, the German regulatory stamp is, in most cases, a proxy to promote the image of the high-profile, heavily-regulated firm among global traders, rather than for targeting German clients in particular.

In addition, the bulk of these brokers’ clients are small private investors, who can keep trading derivatives contracts since the €20,000 offset will not change their trading behavior.

Additionally, German investors can entirely avoid the new taxes by applying to be professional traders, which only costs a few euros. This action, among others, would allow retail investors to structure their transactions to benefit from tax exemptions. In such a case, this phenomenon would eliminate the regulation beneficial effect as forcing traders to trade professionally would not diminish speculation.

“Furthermore, in Germany so-called ‘Optionsscheine’ exists, and they can still be traded without that tax limitation, similar to forex, crypto, and stocks. I expect brokerage firms to promote trading stocks, ‘Optionsscheine’ and forex more actively, and business will change in this direction. Bigger traders may consider starting trading from a company account where unlimited gains can be balanced with unlimited losses before tax. However, company taxes are relatively high if profits are taken out of a company, so it needs a clear business case before taking action,” adds Voigt.

Separately, Germany may prefer to postpone or remain vague about the concrete implementation of new regulations. The country has been trying to levy a larger financial tax on high-risk financial products such as derivatives, but European countries have not been able to agree on a draft to date.

Before that could happen, Berlin is not expected to move forward with heavily taxing its residents before making it a pan-European regulation to mitigate migration of the trading activity.


So the topic of taxation is extremely diverse, complex and nontransparent if you want to tackle it on your own.

The new levies have already been passed in the Bundestag and have already gained the Bundesrat’s approval. Although those concerned are working hard to ensure that the regulators will not interpret the legislation as strictly as it would in the worst case, retail investors should be ready to act due to the heavy tax burdens it involves.

Before going any further, please note that the author is not a tax professional, thus further due diligence or consultation with a tax professional is recommended.

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