FNG Exclusive… FNG has learned that Germany will be reversing a 2020 tax law that has kept many German retail traders out of the CFDs trading market – and which should draw in many more German retail clients into CFD brokerages moving forward.

Germany CFD tax background

In late 2020, Germany’s Bundestag passed the Annual Tax Act 2020 which – among other things – limited the amount of CFDs trading losses which a trader could offset (for capital gains tax purposes) against gains to €20,000 per year. Germans are taxed on gains from securities trades (and other capital gains) at about 25%.

So, for example, under the old law passed in 2020 if a trader totaled his or her ledger at the end of the year, and had some trades that made money – say totaling €1 million – and some other trades that lost money – say totaling €600,000 – the trader would be liable to pay €245,000 in tax. That is, only €20,000 of the losses could be offset against the €1 million in gains before applying the 25% tax rate. That would eat up more than half of the trader’s “real” €400,000 in trading profits for the year.

If a trader “broke even” on his/her trades in a year, say with €1 million in gains and €1 million in losses on other CFDs trades, they would still be liable to pay the same €245,000 in capital gains tax for that year, and end up losing a lot of money.

That punitive tax regime has kept a lot of German retail traders on the sidelines the past four years, although some have found a way around the rules, either by registering as professional traders, or trading through corporate entities, which are taxed differently than individuals without the loss offset limitation.

Loss offset limitation abolished

FNG has learned from several sources in Germany that the country’s ruling coalition has now agreed to fully abolish the €20,000 loss offset limitation on all forward transactions, including CFDs. The change will be retroactive to 2020 – meaning that anyone who was indeed caught by the punitive rules will be able to claim a tax refund, by fully applying losses against any gains made in 2021, 2022, or 2023.

The new proposal still needs to be approved in the Bundestag and passed into law, but the initial reports we have received from Germany call this “very likely” to occur before the end of 2024.

German CFDs market

Germany has the largest economy in Europe with a GDP of about USD $4.1 trillion (the UK is second at about $3.1 trillion). And with a population of nearly 84 million, Germany is the most important CFDs trading market on the continent. So the tax changes could have a major effect on CFDs brokers’ plans for 2025 and beyond, as many German retail traders are likely to return to the market.

One broker which has gotten ahead of the curve is UK/Bulgaria based online broker Trading 212, which this summer acquired German CFDs broker FXFlat, as was exclusively reported at the time here at FNG. Trading 212 paid about €4 million for FXFlat, as was also exclusively uncovered by FNG when we reported on Trading 212’s latest financial results.

FNG spoke with Jens Chrzanowski, Branch Director Germany at XTB, one of the leading Retail FX and CFDs 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 fell significantly. Many experts believe that the reversal of this practice, which is considered unconstitutional, will lead to an increased appreciation of the strengths of CFDs as an effective investment instrument. Consequently, investors in Germany are expected to become more active in this area again, especially given the increasingly turbulent nature of markets in general.

“Lastly, we support the idea of ‘Fair Play’, even in taxation. Many experts believe that it was unfair to differentiate between CFDs and other leveraged instruments such as warrants or leveraged certificates in terms of taxation.”

We will continue to follow this story as it develops. Stay tuned to FNG…