Privately-held foreign currency accounts - Risk of additional charges due to new reporting obligations for German banks as of 2025
Holding personal foreign currency accounts can make economic sense on the basis of various aspects and, in the meanwhile, is playing an ever increasing role in the portfolios of investors. However, the economic benefits should always be weighed up against the increased time and effort necessary in the context of an income tax return, even if, as of 2025, the German banks will have to assume a large part of the task of determining foreign currency gains. Moreover, as a consequence of the reporting obligations, there is a risk that information that has hitherto been omitted will now be discovered.
Previous tax treatment - Private sales transactions
Previously, exchange gains and losses from the sale and repayment of foreign currencies and foreign notes and coins were taxed within the scope of private sales transactions. The holding period of the foreign currency was of relevance. Solely the sale or repayment during the speculation period of one year was taxable. Any gains or losses had to be entered in the personal income tax return as other income and taxed at the standard rate of income tax.
In the opinion of the fiscal administration, foreign currency constitutes a standalone asset. Paying into a foreign currency account therefore results in the ‘acquisition’ of the asset ‘foreign currency’. If the foreign currency is exchanged into euros or another currency, then this would constitute the ‘sale’ of the asset ‘foreign currency’. Such a ‘sale’ during the speculation period of one year will create a taxable gain or loss in the amount of the exchange rate difference.
In order to correctly determine potential taxable private sales transactions, it would, therefore, be necessary to have already maintained portfolios for the holdings of the individual foreign currencies up to now. It has to be assumed here that the foreign currency amounts that were acquired first will be sold first (first in, first out). Furthermore, a subdivision has to be made into tax-relevant and tax-irrelevant sections. Determining this in relation to the type and scope of the transactions could hitherto already be complicated.
New classification as income from capital assets
In a circular of 19.5.2022, published by the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), the fiscal administration partially changed its view with regard to foreign currency gains and losses. According to the circular, foreign currency gains and losses from the sale and repayment of an interest-bearing foreign currency credit balance and an interest-bearing financial claim will need to be categorised as income from capital assets. Here, each deposit transaction into an interest-bearing account (overnight money, time deposit, etc.) will constitute an acquisition transaction. A subsequent repayment would be deemed to be a transaction akin to a sale.
Since all the income from capital assets is subject to withholding tax, the banks are generally obliged to determine the amount of this income. In view of the considerable technical effort that this is expected to involve, the banks were granted a transitional period for the determination and payment of the capital gains tax. However, as of 1.1.2025, at the very latest, the banks have now been obliged to determine the foreign currency gains and losses, to include these in the statement of earnings/tax certificate and to pay the capital gains tax on these earnings.
Consequences for future tax years and those that are still open
1. Responsibility as of 2025
As of 2025, the banks will be required to determine the income from capital assets in accordance with the BMF circular and, where necessary, to subject them to capital gains tax. For all foreign currency transactions that only have to be taxed within the scope of a private sales transaction, the taxpayer will still be required to determine and declare any gains.
2. Ramifications for open assessments up to and including 2024
The aforementioned transitional period, which has now expired, applies solely to the deduction of capital gains tax. The new classification as income from capital assets will affect all the tax years that are still open. This income from capital assets, as well as private sales transactions, will have to be determined and declared within the scope of a tax return. In the case of private sales transactions, the speculation period of one year has to be taken into account, while for income from capital assets the taxation will be independent of the holding period.
3. Important note: Discovery of omitted information in consequence of the new reporting obligations
The new reporting obligation for German banks means that the focus of attention of the fiscal administration will shift to foreign currency accounts. In the future, if foreign currency transactions appear on the tax certificates issued by the banks, then such transactions could also have been done in earlier years. If a declaration in the tax return has been inadvertently omitted up to now, then this could result in an audit by the fiscal administration.
