Tax Loss Harvesting: Realize Losses to Reduce Your Tax Burden

Tax Loss Harvesting refers to deliberately realizing capital losses to offset capital gains from other securities for tax purposes. When you sell a stock at a loss, you can offset that loss against stock gains in the same tax year and reduce the capital gains tax owed. In Germany, this loss offsetting occurs through loss offset accounts maintained by your bank, which automatically offsets gains and losses against each other.

What does Tax Loss Harvesting mean?

The idea is straightforward: stocks in your portfolio trading below your purchase price are sold. The realized loss reduces the taxable income for capital gains tax. The proceeds are then invested in a similar security to maintain your market position. This way, your investment strategy remains intact while the government takes a smaller share of your returns.

The term originally comes from U.S. tax law. There, investors can deduct up to $3,000 in losses per year against regular income. Germany has different rules, but the underlying principle remains the same: use losses to reduce your tax burden.

Tax deferral rather than tax savings

Tax Loss Harvesting doesn't eliminate taxes; it postpones them. The delay works like an interest-free loan from the state: capital that would otherwise flow out as taxes stays invested longer and generates additional returns. Taxation only occurs later when you eventually sell the new security.

Capital gains tax on investment income in Germany

On capital gains, dividends, and interest, the German state levies a flat 25% capital gains tax. On top of this comes a 5.5% solidarity surcharge on the tax, plus possibly church tax. The effective tax rate on investment capital is thus around 26.4 to just under 28%.

What is capital gains tax?

Capital gains tax is the specific form in which capital gains tax is collected. Your bank automatically withholds it when you sell securities and remits it directly to the tax authority. Investors typically don't have to declare this income themselves unless additional clarification is needed.

The savings allowance as a tax-free threshold

Every investor has an annual savings allowance of €1,000 (€2,000 for joint filing). Investment income up to this threshold remains tax-free. Through a tax exemption order with your bank, you ensure this amount is automatically applied and no unnecessary capital gains tax is withheld.

Realizing and offsetting losses

A loss becomes effective for tax purposes only when it is realized through the actual sale of stocks. A mere paper loss in your portfolio doesn't count. Once the sale is executed, the loss goes into the appropriate loss offset account and reduces taxable gains there.

How does offsetting work?

Offsetting is automated through your bank. If you realize both stock gains and stock losses in the same tax year, these are offset against each other. Only the remaining net gain is taxed. If losses exceed gains, a negative balance remains.

A concrete numerical example

Suppose you sell stock A with a capital gain of €5,000 and stock B with a loss of €5,000. Without offsetting, approximately €1,320 in taxes would be due on the stock gain. Through loss offsetting, the loss from stock B fully offsets the gain, and the tax on this transaction drops to zero.

A second scenario: you realize €70,000 in gain from one sale and simultaneously realize €50,000 in losses. Instead of €70,000, only €20,000 is taxed. At a capital gains tax rate of around 26%, you save several thousand euros this way.

Stock losses: a special restriction

In Germany, stock losses are subject to an important rule: losses from the direct sale of individual stocks may only be offset against stock gains. They cannot be offset against dividends, interest, or gains from funds or ETFs.

Can stock losses only be offset against stock gains?

This restriction has sparked discussion for years. If you have only losses from individual stock sales but no corresponding stock gains, you cannot offset these losses against other investment income. The Federal Tax Court has expressed constitutional concerns; a final ruling on the treatment from 2026 onwards is still pending.

Two separate loss offset accounts

Your bank maintains two accounts for each portfolio: a general account for other investment income and a separate account exclusively for stocks. This separation determines which losses can be offset against which gains.

• Stock account: for gains and losses from the direct sale of individual stocks only
• General account: for income from funds, ETFs, bonds, dividends, and interest

Banks manage loss offset accounts automatically

As long as you hold a single portfolio at one bank, the offsetting takes care of itself. The bank continuously offsets realized losses against gains and withholds capital gains tax only on the net amount. You don't need to specify anything in your tax return for this.

Loss certificate for multiple portfolios

If you hold portfolios at different banks, it becomes more complicated. Each bank maintains its own accounts and doesn't know about gains or losses at other institutions. To offset losses at Bank A against gains at Bank B, you need a loss certificate.

Meet the deadline for the certificate

You must request the loss certificate from your bank by December 15 of the current tax year. It shows the losses remaining in the account. You submit this certificate with Schedule KAP in your tax return so the tax authority can process the offsetting across different portfolios.

Loss carryforward and tax return

If more losses remain than gains at year-end, they don't disappear. The unused amount is carried forward as a loss carryforward to the next tax year. This way, losses reduce future stock gains as they occur.

The role of Schedule KAP

If you want to offset losses from multiple portfolios or have a loss carryforward formalized, Schedule KAP in your tax return is the right approach. Here you enter your investment income, capital gains tax already paid, and certified losses.

When a tax return pays off

A voluntary tax return with Schedule KAP is worthwhile if too much capital gains tax was withheld. This often happens when the savings allowance is not exhausted or no tax exemption order was issued. With losses across multiple portfolios, you can also recover overpaid taxes this way.

Losses from derivatives and their limits

Losses from derivatives were long subject to a separate annual cap of €20,000. This offsetting restriction was revised and retroactively eliminated by the Annual Tax Act.

What the Annual Tax Act changed

With the Annual Tax Act, the separate treatment of losses from derivatives was largely eliminated. Since then, losses from such transactions can again be offset more comprehensively against other investment income. This significantly improves tax optimization in portfolios for active traders.

ETF and dividend distributions: how to save on taxes

For ETFs and funds, offsetting works differently than for individual stocks. Capital gains and losses from ETFs go into the general account and can be flexibly offset there against dividends and interest. This offers more options than the strict stock account.

Make use of partial exemption for funds

Equity ETFs benefit from a partial exemption: 30% of income remains tax-free because the fund already pays withholding tax at the fund level. This share automatically reduces the tax base and increases the net return on your investments.

Distributing or accumulating shares

Whether a fund distributes or accumulates affects the timing of taxation. With accumulating ETFs, the advance lump-sum distribution applies so the tax deduction isn't completely deferred until sale. Both variants fall under the same loss offsetting in the general account.

Withholding tax on stocks and ETFs

Dividends from foreign stocks are often subject to withholding tax in their country of origin. Part of this withholding tax is credited against German capital gains tax, typically up to 15%. With a stock like Deutsche Bank Vermögensbildung, no foreign withholding tax applies because it's a domestic issuer.

Avoiding double taxation

If the withheld tax exceeds the creditable portion, you can request a refund of the difference in the respective country. With ETFs, the fund structure handles part of this work, so taxation typically remains simpler for individual investors.

When Tax Loss Harvesting really pays off

The strategy delivers its benefits especially when you've realized high stock gains in the same tax year. Without matching gains, merely realizing losses provides little benefit because the loss carryforward simply waits.

Strategically exploit market volatility

In volatile markets, more opportunities arise to harvest losses. Those who regularly review their portfolio and don't just act in December often find securities trading below their purchase price. Selling and subsequently reinvesting keeps your investment strategy stable.

Strategy limits

Saving taxes with stocks works only within legal boundaries. If you realize losses for offsetting, you should factor in transaction costs and the bid-ask spread when repurchasing. Otherwise, trading will eat up part of your tax advantage.

Practical steps for your portfolio

Tax optimization in your portfolio follows a clear sequence. This order helps ensure you don't miss any deadlines and handle the offsetting cleanly.

1. Review your portfolio for positions with paper losses
2. Identify realized stock gains for the tax year
3. Realize appropriate losses through sales
4. Reinvest proceeds in a comparable security
5. For multiple portfolios, request the loss certificate in time

Optimally distribute your tax exemption order

If you hold multiple portfolios, you should split the tax exemption order across banks generating the highest income. This way, you fully utilize your €1,000 savings allowance and avoid unnecessary capital gains tax.

Frequently asked questions about loss offsetting

Is Tax Loss Harvesting legal in Germany?

Yes. Deliberately realizing losses to offset against gains is completely legal. Loss offsetting is explicitly provided for in the Income Tax Act. Buying back the same or a similar security later is also permitted.

How long does a loss carryforward remain valid?

A loss carryforward doesn't expire. Unused losses remain indefinitely and reduce future gains from securities as they occur. Offsetting happens automatically in the respective account.

Can I offset stock losses against interest?

No. Losses from the direct sale of stocks can only be offset against stock gains. Interest, dividends, and income from funds or bonds belong in the general account and remain separate from pure stock losses.

Does offsetting affect real estate?

No. Gains from real estate sales are subject to regular income tax, not capital gains tax. Securities losses cannot be offset against such income as they fall into separate categories.

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Mastering loss offsetting improves the net return on your investments without taking on additional risk. A look at the tax-free threshold, tax exemption orders, and proper distribution across multiple portfolios provides a solid understanding of your tax burden. With a properly maintained tax return, you can recover overpaid capital gains tax from the tax authority and make your wealth work more efficiently.