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

A well-planned tax return is worthwhile for almost anyone who is active in the capital markets. Investors pay capital gains tax on capital income such as interest, dividends and profits from securities sales at a flat rate of 25 percent, plus solidarity surcharge and, if applicable, church tax.

Banks automatically withhold this tax. If you don't fully utilize the savers' allowance of 1,000 euros, want to offset losses, or have a tax rate below 25 percent, you can recover overpaid amounts through Schedule KAP.

How capital income is taxed in Germany

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

Banks deduct the capital gains tax directly at payout and remit it to the tax office. For you, this means: the deduction often happens automatically without your involvement.

What counts as capital income

Capital gains tax includes interest from savings accounts and fixed-rate deposits, dividends from stocks, and fund distributions. Gains from the sale of securities also fall under this category.

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

Capital gains tax, solidarity surcharge and church tax in detail

A solidarity surcharge of 5.5 percent is added to the capital gains tax. Unlike the general income tax, the solidarity surcharge on capital income was not abolished.

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

Who remits the tax

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

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

The savers' allowance as the most important tax-free threshold

The savers' 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 double the savers' allowance to 2,000 euros. Only income above 1,000 euros is taxed. Such tax-free thresholds are among the most effective ways to reduce the burden.

How the threshold 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 only applies to the 500 euros above the savers' allowance.

The threshold significantly reduces the burden if you use it correctly. If you monitor your income throughout the year, you can strategically utilize the 1,000 euros.

Setting up the tax exemption request correctly

For the bank to recognize the savers' allowance, you need to submit a tax exemption request. Without this request, the institution withholds the full capital gains tax, even if you haven't exhausted the threshold yet.

You submit the tax exemption request directly to your institution, usually online in just a few minutes. One advantage is that 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 split the 1,000 euros. Multiple tax exemption requests must not exceed the savers' allowance in total.

The tax office reconciles individual requests. Allocate the threshold to where the highest income is generated. Anyone with many accounts at different providers should plan carefully here.

Common distribution error

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

The overpaid capital gains tax will be refunded, but the workaround 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's voluntary. A clear rule helps with classification.

Mandatory cases for Schedule KAP

• Capital income without automatic tax withholding, such as from a foreign institution or private loans
• Objection to church tax data retrieval, then you report church tax separately
• Application of substitute measurement basis when acquisition costs are missing for portfolio transfers
• Interest on business accounts or security deposit accounts

When voluntary filing is worthwhile

Even without an obligation, filing a tax return can pay off. This applies if you haven't submitted a tax exemption request, want to offset losses across multiple portfolios, or claim foreign withholding tax credits.

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

Offsetting losses and saving taxes with stocks

Gains and losses from the sale of securities can be netted against each other. Within one bank, this happens automatically.

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

Request 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. Here lies one of the biggest advantages of early planning: you retain the choice of which year to offset them.

Separate offset pools

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

You must observe this separation before you reallocate larger amounts. Those who proceed wisely when saving taxes with stocks plan sales so that gains and losses fall into the same pool.

Favorable assessment: Using a tax rate below 25 percent

If your personal tax rate is below 25 percent, you are overpaying capital gains tax. With the favorable assessment, you request that the tax office tax your capital income at your lower personal rate. You mark this box in Schedule KAP.

Who benefits from favorable assessment

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

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

Basic tax-free allowance and non-assessment certificate

If your total income stays below the basic tax-free allowance of 12,348 euros, you pay no income tax at all. A non-assessment certificate ensures your capital income is paid out without withholding.

You request the non-assessment certificate from the tax office and submit it to the bank. It is valid for three years, after which you request a new one.

Correctly reporting foreign capital income

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

If you omit this, you risk a subsequent demand for payment. The tax office increasingly receives data on foreign portfolios through international reporting requirements.

Claiming withholding tax credit

Foreign countries often withhold their own withholding tax on dividends; 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 advance distributions

For accumulating funds and ETFs, advance distributions apply. They ensure that unreinvested income is taxed on an ongoing basis.

The advance distribution is calculated on the fund value at the beginning of the year, multiplied by a fixed base rate. If you hold ETFs long-term, you encounter this mechanism every year anew.

How the calculation works

The custodian bank automatically withholds capital gains tax on the advance distribution, often in January of the following year. If you later sell shares, the previously taxed advance distribution is credited against the sale gain.

So you don't pay twice. If you hold your shares for many years, the withheld amounts add up but are offset at the time of sale.

Partial exemption for equity funds

Since the 2018 investment tax reform, 30 percent of income from equity funds is tax-free. This partial exemption accounts for the fact that funds already pay taxes at the corporate level.

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

Deductible expenses and special cases for investors

With capital gains tax, deductible expenses are generally covered by the savers' allowance. An additional deduction for individual expenses is not provided here.

Deductible expenses for investors therefore only play a role in special situations, such as when capital investments are part of business assets. Anyone who wants to deduct investor expenses should examine these special cases carefully, as the tax office looks closely here.

Existing holdings before 2009

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

For funds, there is a 100,000 euro exemption for appreciation as of 2018. This 100,000 euro limit applies per person, so married couples can use it twice. You strategically use such existing holdings before reallocating.

Private sales transactions with gold and crypto

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

Within the timeframe, there is a 1,000 euro exemption limit: if 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

Careful preparation avoids inquiries from the tax office and secures refunds for you. The following aspects form the core of a well-planned investor tax return.

Collect and review 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 withholding tax and advance 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 individuals correctly record capital investments in business assets.

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

Keep 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.

Important figures for investors at a glance

These values form the basis for almost 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
• Savers' allowance: 1,000 euros per person, 2,000 euros for married couples
• Basic tax-free allowance: 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 errors that cost real money

The most expensive error is filing no return at all. Many investors miss refunds because they distributed their tax exemption request incorrectly or overlooked the favorable assessment.

Also, unreported income from a foreign institution frequently causes problems with the tax office.

Don't confuse exemption limit with tax-free threshold

A widespread misconception concerns the 1,000 euro limit for gold and crypto. Unlike the savers' allowance, this is an exemption limit, not a tax-free threshold.

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

Plan early rather than correct retroactively

Those who take tax exemption requests, loss offsetting, and favorable assessment into account during the year avoid unnecessary advance payments to the tax office.

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