Tax Loss Harvesting: Using Losses for Tax Benefits and Reducing Tax Burden

Tax Loss Harvesting refers to the deliberate realization of capital losses in order to offset capital gains from other securities for tax purposes. When you sell a stock at a loss, you can use that loss to offset stock gains in the same tax year and thereby reduce the capital gains tax owed. In Germany, this loss offsetting runs through the bank's loss offsetting pools, which automatically net gains and losses against each other.

What does Tax Loss Harvesting mean?

The idea is simple: stocks in your portfolio that are trading below your purchase price are sold. The realized loss reduces the basis for capital gains tax. The proceeds are then invested in a similar security so that your market position remains intact. This way, your investment strategy stays on track while the government receives less of your earnings.

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 basic principle remains the same: use losses for tax purposes to reduce your tax burden.

Tax deferral instead of tax savings

Tax Loss Harvesting does not eliminate taxes; it defers them. The deferral works like an interest-free government loan: capital that would otherwise flow out as taxes remains invested longer and generates additional returns. Taxation only occurs when you later sell the new security.

Capital gains tax on investment income in Germany

Germany imposes a flat 25 percent capital gains tax on price gains, dividends, and interest. In addition, there is a solidarity surcharge of 5.5 percent on the tax plus potentially church tax. The effective burden on investment assets is thus around 26.4 to just under 28 percent.

What is capital gains tax?

Capital gains tax is the specific form of collection for capital gains tax. The bank automatically withholds it when selling securities and remits it directly to the tax authorities. Investors generally do not need to report this income themselves, provided there is no additional clarification needed.

The savings allowance as a tax exemption

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

Realizing and offsetting losses

A loss only becomes tax-effective when it is realized, that is, through the actual sale of the shares. A mere paper loss in your portfolio does not count. Once the sale is executed, the loss lands in the appropriate loss offsetting pool and reduces taxable gains there.

How does the offsetting work?

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

A concrete calculation example

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

A second scenario: you make 70,000 euros in gains from one sale and simultaneously realize 50,000 euros in losses. Instead of 70,000 euros being taxed, only 20,000 euros are taxed. With a capital gains tax of around 26 percent, you save several thousand euros this way.

Stock losses: the special restriction

For stock losses in Germany, an important rule applies: losses from the direct sale of individual shares 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 debate for years. If you only have losses from individual stock sales but no corresponding stock gains, you cannot offset these losses against other investment income. The Federal Tax Court has raised constitutional concerns, and a final ruling on treatment from 2026 onwards is still awaited.

Two separate loss offsetting pools

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

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

Banks manage loss offsetting pools automatically

As long as you hold a single account with one bank, the offsetting happens automatically. The bank continuously offsets realized losses against gains and withholds capital gains tax only on the net amount. You don't need to enter anything in your tax return for this.

Loss certificate for multiple accounts

If you hold accounts at different banks, it becomes more complicated. Each bank maintains its own pools and is unaware of the gains or losses at others. To offset losses from Bank A against gains at Bank B, you need a loss certificate.

Meeting the certificate deadline

You must request the loss certificate from the bank by December 15 of the current tax year. It documents the losses remaining in the pool. You submit this certificate with Schedule KAP when filing your tax return so that the tax office can process the offsetting across multiple accounts.

Loss carryforward and tax returns

If more losses than gains remain at year-end, they are not lost. The unused amount is carried forward as a loss carryforward into the next tax year. In this way, losses reduce future stock gains once they occur.

The role of Schedule KAP

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

When filing a tax return makes sense

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

Losses from derivatives and their limits

For losses from derivatives, a separate annual ceiling of 20,000 euros once applied. This offsetting restriction was revised through the Annual Tax Act and retroactively eliminated.

What the Annual Tax Act changed

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

ETF and dividend distributions: how to save taxes

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

Using the partial exemption for funds

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

Distributing or reinvesting shares

Whether a fund distributes or reinvests income affects the timing of taxation. With reinvesting ETFs, the advance provision applies so that tax withholding is not completely deferred until sale. Both variants fall under the same loss offsetting in the general pool.

Withholding tax on stocks and ETFs

Dividends from foreign stocks are often subject to withholding tax in the country of origin. Part of this withholding tax is credited against German capital gains tax, typically up to 15 percent. For a stock like Deutsche Bank asset-building shares, no foreign withholding tax applies because it is a domestic issuer.

Avoiding double taxation

If the withheld tax exceeds the creditable portion, you can claim back the difference in the respective country. With ETFs, the fund structure handles part of this work, which is why taxation for individual investors usually remains simpler.

When Tax Loss Harvesting really pays off

The strategy delivers its greatest benefit when you have realized significant stock gains in the same tax year. Without matching gains, simply realizing losses offers little advantage because the loss carryforward then just waits.

Strategically exploiting market volatility

In volatile markets, more opportunities arise to harvest losses. If you review your portfolio regularly and not just in December, you more often find securities trading below your cost basis. Selling and subsequently reinvesting keeps your investment strategy stable.

Strategy limitations

Saving taxes with stocks works only within legal guidelines. When realizing losses for offsetting, you should factor in transaction costs and the bid-ask spread for repurchasing. Otherwise, the trading will partly eat away at the tax benefit.

Practical steps for your portfolio

Tax optimization in your portfolio follows a clear sequence. This order helps you meet all deadlines and execute the offsetting cleanly.

1. Review your portfolio for positions with paper losses
2. Identify realized stock gains for the tax year
3. Realize matching losses through sale
4. Reinvest the proceeds in a comparable security
5. Request the loss certificate timely if you hold multiple accounts

Distribute your tax exemption order optimally

If you hold multiple accounts, you should split your tax exemption order across the banks where your highest income is generated. This way you fully utilize the 1,000-euro 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. Repurchasing the same or a similar security at a later date is also permitted.

How long is a loss carryforward valid?

A loss carryforward does not expire. Unused losses remain valid indefinitely and reduce future gains from securities once they occur. The offsetting happens automatically in the respective appropriate pool.

Can I offset stock losses against interest?

No. Losses from the direct sale of shares can only be offset against stock gains. Interest, dividends, and income from funds or bonds go into the general pool and remain separate from pure stock losses.

Does offsetting affect real estate?

No. Gains from the sale of real estate are subject to regular income tax and not capital gains tax. Losses from securities cannot be offset against such income because they are separate categories.

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Once you master loss offsetting, you improve the net return on your investments without higher risk. A closer look at tax exemptions, tax exemption orders, and proper distribution across multiple accounts gives you a solid overview of your own tax burden. With a properly maintained tax return, you recover overpaid capital gains tax from the tax office and let your wealth work more efficiently.