Offsetting of losses for tax purposes - An overview of the changes
The possibilities to offset losses for income tax purposes are of key importance both to companies as well as private individuals because these rules can significantly influence the tax burdens and financial planning for taxpayers. This report demonstrates how, over the course of the past few years, the rules on the offsetting of losses have been adjusted to reflect changes in the general economic conditions.
Basic principles and amount limits for offsetting of losses (Section 10d EStG)
According to Section 10d of the Income Tax Act (Einkommenssteuergesetz, EStG), losses that have arisen in the year under review may be offset against profits in previous years (a loss carryback) or subsequent years (a loss carryforward). Losses may be carried back for a maximum of 2 years provided that positive income is available. The maximum limit that applies here is €1,000,000 (or €2,000,000 for joint tax assessments). If a carryback is not possible then the loss may be carried forward to the coming years. In doing so, losses of up to €1,000,000 can be deducted with no restrictions and above and beyond that up to 70% of the overall amount of income that exceeds €1,000,000 may be deducted. The remaining 30% may then be offset in subsequent years. This applies for both private individuals as well as partnerships and, via Section 8(1) of the German Corporation Tax Act, the following explanations are similarly applicable to corporations.
Development of amount limits
The development of restrictions on offsetting losses has been characterised by significant changes, in particular, with respect to the loss carryback and the loss carryforward. In the period from 2020 to 2023, taxpayers were able to carry back losses of up to €10,000,000 (or €20,000,000 for joint tax assessments) to provide relief during the COVID-19 pandemic. As of 2024, this amount was again reduced to €1,000,000 (or €2,000,000 for joint tax assessments).
There were also adjustments to the loss carryforward. Prior to 2024, the percentage rate of the offset losses was 60%. With the coming into force of the German Growth Opportunities Act this percentage rate was raised to 70% for the 2024 to 2027 assessment periods. These changes were an expression of the effort to reduce the tax burden in challenging times and simultaneously to create incentives for economic growth.
Eligible types of income against which losses can be offset
Losses and gains from the following types of income can be offset against each other within an assessment period (although deviations from this principle have to be made in particular cases, see for example, losses at German limited partnerships (Kommanditgesellschaften) pursuant to Section 15a EStG):
- income from agriculture and forestry
- income from trade or business
- income from self-employment
- income from employment
- income from letting and leasing
By contrast, losses among the income from capital assets (please see section 4 for details) and from private sales transactions may not be offset against the above-mentioned income types nor against each other.
Particularities for investment income
pursuant to Section 20(6) EStG
Within the scope of income from capital assets there are still further restrictions on the offsetting of losses that are regulated in Section 20(6) EStG. If a taxpayer generates losses from privately held capital assets, then the thinking is in terms of so-called loss offset pots. This means that separate ‘pots’ are created where the losses are captured. For example, losses on equities would be captured in the equities loss offset pot. Subsequently, losses on equities can be offset solely against capital gains from equities.
Up to the end of 2024, for futures and options transactions there were likewise separate loss offset pots where both gains and losses could only be offset against each other. Furthermore, for futures transactions there was another restriction that only €20,000 of losses per year could be offset against the gains from futures transactions. Losses exceeding that amount had to be carried forward to the subsequent year and could only be offset against gains from futures transactions.
Ultimately, very detrimental situations could arise as a result where the taxpayer had to pay tax on gains from futures transactions even though overall, in the assessment year, more losses than gains were generated from futures transactions. This restriction was abolished with the 2024 Annual Tax Act and will be applied to all open cases. In particular, sentences 5 and 6 of Section 20(6) EStG were deleted.
Conclusion and outlook
The developments described above regarding the offsetting of losses, notably those in relation to income from capital assets, are generally to be welcomed. The highest court has not yet clarified whether or not the restriction on the offsetting of losses in the case of equities conforms with the constitution or is contrary to the principle of equal treatment (Article 3, paragraph 1 of Germany's Basic Law). A case in this respect is still pending before the Federal Constitutional Court.
