Tax Return for Investors: How to Recover Overpaid Capital Gains Tax

A well-planned tax return for investors pays off for nearly everyone who is active in the capital market. Investors pay tax on capital income such as interest, dividends, and gains from securities sales with capital gains tax of 25 percent, plus solidarity surcharge and possibly church tax.

Banks automatically withhold this levy. If you don't fully use the saver's allowance of 1,000 euros, want to offset losses, or have a tax rate below 25 percent, you recover overpaid amounts via Schedule KAP in your tax return.

How capital income is taxed in Germany

Since 2009, capital income has been subject to capital gains tax. The rate is flat at 25 percent, regardless of your personal income tax rate.

Banks deduct the capital gains tax directly upon payout and forward it to the tax office. For you, this means: the deduction often happens without you needing to take action.

What counts as capital income

Capital gains tax includes interest from savings accounts and fixed-rate accounts, dividends from stocks, and distributions from funds. Gains from selling securities also fall under this category.

Income from bonds and investment funds also counts. Capital gains tax thus covers virtually every form of investment in the capital market. If you invest in bonds, you should know that ongoing interest payments are also captured. Capital gains tax therefore reaches deep into every portfolio.

Capital gains tax, solidarity surcharge, and church tax in detail

On top of the capital gains tax comes the solidarity surcharge of 5.5 percent. Unlike the general income tax, the solidarity surcharge on capital income was not abolished.

Church members additionally pay church tax of 8 or 9 percent, depending on the state. Without religious affiliation, the total burden is around 27.99 percent; with church tax, this figure rises above 27.99 percent.

Who pays the tax

The bank acts as tax collector. It withholds the capital gains tax as a source tax and forwards it.

With German accounts, this happens automatically. With an institution abroad, this mechanism is missing, so you must report the income yourself.

The saver's allowance as the most important tax exemption

The saver's allowance protects part of your capital income from capital gains tax. Since 2023, it is 1,000 euros per person per year.

Married couples filing jointly can double the saver's allowance to 2,000 euros. Income above 1,000 euros is subject to tax. Such exemptions are among the most effective levers for reducing the tax burden.

How the exemption works in practice

If you earn 800 euros in interest and dividends, everything remains tax-free. If your income is 1,500 euros, capital gains tax applies only to the 500 euros above the saver's allowance.

The exemption significantly reduces the tax burden if you use it correctly. If you keep track of your income throughout the year, you can fully utilize the 1,000 euros.

Setting up a tax exemption request properly

For the bank to consider the saver's allowance, you need a tax exemption request. Without this request, the institution deducts the full capital gains tax, even if you haven't used up the exemption at all.

You submit the tax exemption request directly with your institution, usually online in just a few minutes. The advantage is that the capital gains tax is not withheld in the first place.

Distributing tax exemption requests across multiple banks

If you have accounts and portfolios at different institutions, you must divide the 1,000 euros. Multiple tax exemption requests must not exceed the saver's allowance in total.

The tax office verifies the individual requests. Allocate the exemption to where the highest income arises. Anyone with many accounts at different providers should plan carefully here.

Common mistake in distribution

Many investors set a full tax exemption request at one bank but leave it unused there, while another institution deducts capital gains tax. You can correct this mistake through your tax return.

The overpaid capital gains tax then comes back, but the detour costs time.

When you must file Schedule KAP

Schedule KAP is the central form for capital income in the income tax return. In certain cases, filing is mandatory; in others, it is voluntary. A clear rule helps with classification.

Mandatory cases for Schedule KAP

• Capital income without automatic tax withholding, such as from an institution abroad or from private loans
• Objection against church tax data retrieval; then you add the church tax accordingly
• Application of substitute assessment basis if acquisition costs are missing for portfolio transfers
• Interest on business accounts or rent deposit accounts

When voluntary filing is worthwhile

Even without a requirement to file, a tax return can be worthwhile. This applies if you haven't submitted a tax exemption request, want to offset losses across multiple portfolios, or want to claim foreign source tax credit.

According to the German Federal Statistical Office, the average refund is around 1,097 euros per return. For investors with unused tax exemption requests, it is often even higher.

Offsetting losses and saving taxes with stocks

Gains and losses from selling securities can be offset against each other. Within one bank, this happens automatically.

However, if your investments are with multiple institutions, you must take action. Saving taxes with stocks works to the full extent only if you initiate offsetting across all portfolios.

Requesting a loss certificate in time

If you want to offset losses at Bank A with gains at Bank B, you need a loss certificate. You must request this by December 15 of the respective year.

If you miss the deadline, the institution automatically carries the losses forward to the following year. This is one of the biggest advantages of early planning: you retain the choice of which year to offset in.

Separate offset buckets

Losses from stocks may only be offset against gains from stocks. Other capital income such as dividends or interest runs in a separate bucket.

Observe this separation before you shift larger sums. Those who proceed strategically when saving taxes with stocks plan sales so that gains and losses fall in the same bucket.

Favorable assessment: using a tax rate below 25 percent

If your personal tax rate is below 25 percent, you pay more than necessary with capital gains tax. With favorable assessment, you request that the tax office tax your capital income at the lower personal rate. You mark the box for this in Schedule KAP.

Who benefits from favorable assessment

Beneficiaries are primarily retirees, students, part-time workers, and those on parental leave. With taxable income of around 20,350 euros or less, the personal rate is below the flat rate.

Those whose income falls below the 20,350-euro threshold benefit the most. The tax office automatically checks which option is more favorable and applies it.

Basic exemption and non-assessment certificate

If your entire income stays below the basic exemption of 12,348 euros, you pay no income tax at all. A non-assessment certificate ensures that your capital income is paid without deduction.

You request the non-assessment certificate from the tax office and submit it to the bank. It is usually valid for three years; after that, you request it again.

Correctly reporting capital income from abroad

Income from a broker abroad is also subject to German taxation. Here, no German institution withholds capital gains tax, so you enter this income yourself in Schedule KAP.

If you fail to do this, you risk a subsequent tax assessment. The tax office increasingly receives data on foreign portfolios through international reporting requirements.

Claiming foreign source tax credit

Foreign dividends are often subject to a source tax by the source country; in many countries it is 15 percent. This can be credited against German capital gains tax to avoid double taxation.

You can find the creditable amount in your annual tax certificate.

Funds and ETFs: understanding accrual distributions

With distributing funds and ETFs, accrual distributions apply. They ensure that even unreinvested income is continuously taxed.

The accrual distribution is calculated on the fund value at the beginning of the year, multiplied by a fixed base interest rate. Those who hold ETFs long-term encounter this mechanism anew each year.

How the calculation works

The custodian bank automatically deducts the capital gains tax on the accrual distribution, often in January of the following year. When you later sell shares, the already-taxed accrual distribution is credited against the gain on disposal.

So you don't pay twice. If you hold your shares for many years, the withheld amounts accumulate but are offset when you sell.

Partial exemption for equity funds

Since the Investment Tax Reform of 2018, 30 percent of income from equity funds is tax-free. This partial exemption compensates for the fact that funds pay taxes at the corporate level.

For you as an investor, this reduces the effective burden on distributions and gains on disposal from investment funds. For mixed funds, a reduced partial exemption of 15 percent applies.

Deductible business expenses and special cases for investors

With capital gains tax, deductible business expenses are generally covered by the saver's allowance. An additional deduction of individual expenses is not provided here.

Deductible business expenses for investors therefore play a role only in special circumstances, for example, if capital investments are part of business assets. If you want to deduct deductible business expenses for investors, you should carefully examine these special cases, as the tax office looks closely here.

Legacy holdings before 2009

Securities you purchased before January 1, 2009 enjoy grandfather clause protection. Gains from these stocks remain tax-free.

For funds, there is an exemption of 100,000 euros on appreciation gains as of 2018. This 100,000-euro limit applies per person; married couples can thus use it twice. You use such legacy holdings strategically before you restructure.

Private disposals with precious metals and crypto

Gains from gold or cryptocurrencies are not subject to capital gains tax but instead to the rules for private disposals. If you hold the investment for at least one year, the gain remains tax-free.

Within the holding period, there is a exemption limit of 1,000 euros: if it is exceeded, the entire gain is taxable. These rules thus differ significantly from the system for securities.

Practical steps for your tax return as an investor

Clean preparation saves follow-up questions from the tax office and ensures you receive refunds. The following aspects form the core of a well-planned tax return for investors.

Collecting and checking documents

1. Request annual tax certificates from all banks and brokers
2. Request loss certificates by December 15
3. Reconcile information on dividends, interest, and capital gains
4. Note foreign source tax and accrual distributions

Using software and ELSTER

Electronic filing via ELSTER or tax software greatly simplifies completing Schedule KAP. Accounting solutions like Lexware Office also help self-employed persons correctly record capital investments in business assets.

Digital filing reduces transmission errors and speeds up processing. At many tax offices, processing time for electronic returns is around four to eight weeks.

Keeping deadlines in mind

For mandatory filing, the deadline is July 31 of the following year. For voluntary filing, you have up to four years to recover overpaid capital gains tax.

You should know this deadline if you want to file a past income tax return.

Key figures for investors at a glance

These values form the basis for nearly every decision regarding the taxation of your investments:

• Capital gains tax: 25 percent on capital income
• Solidarity surcharge: 5.5 percent on capital gains tax, total burden around 27.99 percent
• Saver's allowance: 1,000 euros per person, 2,000 euros for married couples
• Basic exemption: 12,348 euros per person
• Partial exemption for equity funds: 30 percent tax-free
• Exemption limit for gold and crypto: 1,000 euros per year

Common mistakes that cost real money

The costliest mistake is not filing a return at all. Many investors miss out on refunds because they distributed the tax exemption request incorrectly or overlooked favorable assessment.

Income from an institution abroad that is not reported also frequently causes problems with the tax office.

Don't confuse exemption limit with exemption

A widespread misconception concerns the 1,000-euro limit for gold and crypto. Unlike the saver's allowance, this is an exemption limit, not an exemption.

If you exceed it, the entire gain is taxable, not just the excess. Investors regularly underestimate this distinction.

Plan early instead of correcting later

Those who consider tax exemption requests, loss offsetting, and favorable assessment in the current year avoid unnecessary advance payments to the tax office.

This way more of your gains from stocks, dividends, and interest remains directly in your portfolio instead of first flowing back through your tax return.