German taxation on dividends and capital gains

71 posts in this topic

Thank you, PandaMunich. 

 

Sorry just noticed my mistake - 200 USD on 1 Jan 2016 would have been 184 EUR, not 217EUR.  but thanks for confirming alternative a.  

 

Best regards 

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@PandaMunich

 

A scant few months ago I would have noted your response to jasperdrm and silently nodded my head in agreement.  I might also have chipped in a remark about how applying the "functional currency" rules found in §988 of the US tax code would have produced a different result if jasperdrm were a US citizen and had purchased and sold EUR denominated shares on a EUR denominated brokerage account.

 

Sadly, I now have strong reason to believe that your answer is not correct.

 

Legislation in 2014 and recent (2014) and not so recent (2012 and earlier) decisions of the BFH have made it clear that both the purchase and sale of securities denominated in foreign currency and purchased with funds held in a foreign cash account will trigger German foreign currency gains or losses.  Worse, those foreign currency gains and losses will be taxed at ordinary income rates (up to 45% + SolZ) unless the holding period ("Spekulationsfrist") exceeds 10 years. In other words, the foreign currency gain or loss component on the transaction will be computed and taxed separately and apart from the capital gain or loss on the sale of the underlying security.

 

Since such transactions are not subject to the Abgeltungssteuer, the individual taxpayer bears the responsibility for computing the gains or losses and reporting them on his or her German Steuererklärung.  This appears to be true even if the bank where the foreign currency is maintained is a German bank that otherwise would be obligated to do the calculations and withhold any Abgeltungssteuer.

 

Here are links to a couple of what are likely many dozens of articles/reports on the subject of computing Fremdwährungsgewinne:

 

http://www.faz.net/aktuell/finanzen/devisen-rohstoffe/fremdwaehrungen-spekulieren-mit-devisen-12922113.html

 

 

https://www.private-banking-magazin.de/pdf.php?id=7419

 

 

Apparently the travails of Uli Hoeneß are the source of the recent focus by the Finanzamt on a subject that had been pretty much ignored for a long time.

 

In short, the German tax complexity of buying and selling securities through a foreign currency account are now just as complicated as they are for US citizens living in Germany who buy and sell securities on a German EUR account.

 

Nasty.

 

 

 

 

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@PandaMunich

 

The key as to whether the 1 year or 10 year holding period applies, appears to be whether the $100 that Jasperdrm used to buy the shares in January 2010 were held in an interest bearing or non-interest bearing USD account.  That was the opinion given by the Bavarian Landesamt für Steuer and it appears to be widely accepted:

 

http://datenbank.nwb.de/Dokument/Anzeigen/498931/

 

I personally cannot begin to understand the distinction but assuming that interpretation is correct, I think we would have to ask Jasperdrm for more information about the source of the $100 he used to purchase the fund in his example and when he acquired them before we could answer his question.

 

And what would be the German EUR basis of USD owned by, e.g. a US citizen before becoming a German tax resident?  Would it be a single exchange rate for all USD (e.g. in effect on the beginning date of tax residency) or would all his USD have to be assigned a different EUR value depending upon when he acquired them?

 

Oy ve!

 

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Let's have a look at this new sentence §23 Absatz 1 Nr. 2 Satz 4 EStG:

"4Bei Wirtschaftsgütern im Sinne von Satz 1, aus deren Nutzung als Einkunftsquelle zumindest in einem Kalenderjahr Einkünfte erzielt werden, erhöht sich der Zeitraum auf zehn Jahre."

 

As Wirtschaftsgut (which is just tax-speak for a "thing"), you have the foreign currency (= Fremdwährung) - in Jasper's case $.

So, for this sentence to apply to that foreign currency, and for the speculation period to be prolonged to 10 years, the currency itself needs to have created income (= Einkünfte). This will only be the case if that account was interest bearing.

 

Buying a stock/fund with a foreign currency doesn't mean that the profit from the sale of the foreign stock/fund suddenly falls under §23 EStG "Private Veräußerungsgeschäfte" which according to §22 Nr. 2 EStG are "sonstige Einkünfte" as defined in §2 Absatz 1 Satz 1 Nr. 7 EStG.

Only the earnings from foreign currency itself are "sonstige Einkünfte" and would have to be taxed at Jasper's personal, variable income tax rate (not at the 25% Abgeltungsteuer flat rate)

 

Profit from selling stocks/funds falls under §20 Absatz 2 Nr. 1 EStG, i.e. it is capital income ("Einkünfte aus Kapitalvermögen") as defined in §2 Absatz 1 Satz 1 Nr. 5 EStG, and is taxed with the Abgeltungsteuer of 25%+Soli (except if he owns 1% or more of a company, then it's taxed differently, see my post of 23. August 2016).

 

This position is also taken by the BFH in its ruling of 21.1.2014 BStBl. II S. 385 (which is also mentioned in the Einkommensteuer-Hinweise, which are part of Einkommensteuer-Richtlinien, under "Fremdwährungsgeschäfte", so it's known to the Finanzamt and it has to apply this ruling), in which they say that selling a stock/fund and getting an amount in a foreign currency for it means:

  1. that stocks/funds are sold (this falls under §20 Absatz 2 Nr. 1 = Einkünfte aus Kapitalvermögen), and, that at the same time,
  2. the amount in foreign currency that you get for said stock/fund is "bought" (this being a foreign currency transaction, it falls under §23 Absatz 1 Nr. 2 EStG).

 

So, as long as:

  1. Jasper's foreign currency account isn't in itself interest-bearing, and
  2. he didn't reuse that specific tranche of his $ within the normal speculation period of 1 year for buying another stock/fund (which would be unlikely, since they assume a FIFO - first-in-first-out - order of using up the money, see §23 Absatz 1 Nr. 2 Satz 3 EStG so he would have first needed to have spent all his "older" $ in order to reach that specific tranche of his money)

then what I told Jasper on 28.9.2016 further up in the thread holds true.

 

Here's a nice article with an example showing a case where the above condition 2 isn't fulfilled, it's a non-interest-bearing $ account (condition 1 is fulfilled), but the owner makes the mistake of trading at intervals of less than a year and of re-using that same amount of money each time (well, he doesn't have any choice, since he always uses the whole amount of $ he owns).

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1 hour ago, Straightpoop said:

And what would be the German EUR basis of USD owned by, e.g. a US citizen before becoming a German tax resident?  Would it be a single exchange rate for all USD (e.g. in effect on the beginning date of tax residency) or would all his USD have to be assigned a different EUR value depending upon when he acquired them?

 

I would assume that they only care about specific tranches of $ that he "bought" after becoming resident in Germany, since any $ he owned at the moment he moved here were not acquired through "buying" $.

 

So, as long as his $ account is not interest-bearing in itself, only if he starts trading heavily and doesn't let a specific tranche of $ that he made from a trade (which in German tax speak is seen as "buying" the USD) "cool-off" for at least a year before reusing them in a trade, would he have to note down the exchange rate $/€ on the day he made those $, so that he will know how much profit he makes from a Fremdwährungsgeschäft (currency deal, i.e. from "buying"/"selling" those $) the day that he "sells" that specific tranche of $ again when he buys another stock/fund with it.

 

If his $ account is interest-bearing in itself, then yes, the speculation period is extended to 10 years, i.e. the only way he would avoid having to note down the $/€ exchange rate at each trade and having to tax currency gains would be to let all tranches of his $ "cool-off" for at least 10 years before re-using that tranche for buying another stock/fund.  

 

************************************************************************************

 

They clearly wrote this law thinking of the standard German taxpayer who keeps all his money in a German bank and for whom the "normal" currency in which he has all the dealings of his day-today life in, is the €. 

Anyone trading in a currency other than the € through a non-German bank must clearly be up to no good, i.e. be a potential tax evader, otherwise he would be dealing through a German bank in € like a good loyal German tax subject would ;)

 

They did not stop to consider that this law also affects people for whom their non-€ currency is the "normal" currency in which they have been earning all their lives, and that that was the currency in which they have had - up till the moment of moving to Germany - all the dealings of their day-to-day life in.

And that for these people, it's the most "normal" thing in the world to continue using their old home country bank account and depot for their trades, being used to being good loyal (former, though in the case of the US, continuing) tax subjects of their home country.

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@PandaMunich

 

Thanks for your thoughts and the references concerning when and under what circumstances transactions in foreign currency will trigger taxable foreign currency gains/losses in addition to or as distinguished from the "ordinary" gains and losses on the sales of a particular investment.

 

The original question, however, was how to compute the "ordinary" gain or loss under §20 ESt for purposes of the Abgeltungssteuer.

 

Option a. was to measure BOTH the cost basis and proceeds in the foreign currency (USD in the example) and then converting the difference into EUR at the rate prevailing on the date of the sale to determine EUR gain or loss. 

 

Option b. was to convert the USD cost into EUR on the date of the purchase to obtain the EUR cost basis and then convert the USD proceeds into EUR on the date of the sale.  A comparision of the two EURO values would determine gain or loss.

 

In reading the various decisions and commentary there seems to be no dispute that the second of these options (b.) is the required methodology - regardless of when or how the USD for the purchase were originally obtained or whether they were held in an interest bearing account before the purchase of the USD denomininated investment.

 

The method you told Jasperdrm to use is the one I used to think was the right one but which the decisions all seem to agree is not the one permitted.  Logically, that should also be the result.  If gain were computed using option a. for a German tax resident who immigrated holding a foreign bank account but under option b. for a German resident who buys the foreign security using funds in his EUR account there will be different outcomes for different taxpayers under identical economic circumstances.

 

 

The potential foreign currency gain or loss and the 1 or 10 year holding periods is a separate issue from the §20 computation.

 

The idea stated in the decisions is that foreign currency effectively has no EUR basis for purposes of computing or triggering a foreign currency gain or loss under § 23 unless it is first PURCHASED or, if not purchased, is used to purchase something else.

 

This insistence on a "purchase" (either of foreign funds or a foreign investment) in order to have a conversion event" establishing the EUR value of the foreign funds is to my mind inexplicable.

 

In this regard I note that a German resident who receives a gift or inheritance of USD (or any other foreign currency) and who does not "repatriate" that money by bringing it to Germany is nevertheless obligated to declare the gift or inheritance at its EUR value on the effective date of his inheritance.  The same would be true of a German resident who is paid by a foreign employer in a foreign currency deposited to a foreign account.  The money must be valued in EUR at the rate prevailing when earned and declared as income on the German tax resident's income tax return regardless whether the money is ever brought to Germany or actually converted to EUR.

 

If the EUR value of these USD amounts received as gift, inheritance or wages changes from the time they were first acquired and valued to the time they are actually converted into EUR, has there been a gain or loss?  If such funds are just allowed to sit in a non-interest bearing account to which it was orginally deposited would its later conversion to EUR within 1 year after its mere acquisition be a potentially taxable transaction?  As §20 Kapitaleinkünfte?  As §23 foreign currency gain?   Both?  Neither?

 

About the only scenario I can think of where there would be no "conversion" event for the acquisition of foreign funds would be the example that is very common within the TT community:   A non-German resident becomes a German tax resident and at the time of his or her status "conversion" is the owner of foreign currency held in a foreign account or they inherit foreign funds after obtaining German tax residence but the (undeclared?) EUR value is below the gift or inheritance tax threshold.

 

I find all of this almost as bizarre on the insistence by the US that every US individual's "functional currency" is the USD regardless of where they live or what their "functional" currency actually is.  The US rules make every transaction in a foreign currency (from buying a company to buying a Happy Meal at McDonald's) a potentially taxable event thus making it practically impossible for any US citizen living abroad to ever be completely accurate on their income tax returns.  However, the IRS, to its everlasting credit, doesn't give a rip about such things.

 

 

 

 

 

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3 hours ago, Straightpoop said:

About the only scenario I can think of where there would be no "conversion" event for the acquisition of foreign funds would be the example that is very common within the TT community:   A non-German resident becomes a German tax resident and at the time of his or her status "conversion" is the owner of foreign currency held in a foreign account or they inherit foreign funds after obtaining German tax residence but the (undeclared?) EUR value is below the gift or inheritance tax threshold.

 

Yes, that's exactly the problem I see in Jasper's case, he came to Germany with those USD already in tow, so there is no prior purchase of the USD that he used for buying the stocks/funds, and therefore no €/$ exchange rate attached to that purchase of the stocks/funds.

So I think that in this case, simply converting the $ profit he made when selling the stocks/funds into € by using the exchange rate from the day he sold these stocks/funds would be the right thing to do.

 

What other way do you propose?

 

2 hours ago, Straightpoop said:

If the EUR value of these USD amounts received as gift, inheritance or wages changes from the time they were first acquired and valued to the time they are actually converted into EUR, has there been a gain or loss?  If such funds are just allowed to sit in a non-interest bearing account to which it was orginally deposited would its later conversion to EUR within 1 year after its mere acquisition be a potentially taxable transaction?  As §20 Kapitaleinkünfte?  As §23 foreign currency gain?   Both?  Neither?

 

Actually, things get a bit more complicated in the case of gifts/inheritances, since the person receiving the gift/inheritance, regularly also "inherits" the circumstances associated with that gift, that's what §23 Satz 2 EStG means:

3Bei unentgeltlichem Erwerb ist dem Einzelrechtsnachfolger für Zwecke dieser Vorschrift die Anschaffung oder die Überführung des Wirtschaftsguts in das Privatvermögen durch den Rechtsvorgänger zuzurechnen.

 

There is no clear break at the moment that you get the money, you enter the gift-giver's/testator's shoes with that regard.

So they would first check whether the person giving/leaving the money had "purchased" those USD, at what date and at what exchange rate (not very likely for cases here on TT).

 

And since there will most probably be no "purchase" (Anschaffung) of those $ by the person giving/leaving the money, we are back at the starting point: what exchange rate do we have to use, and what date of "purchase"?

 

I really don't know, but I suspect the Finanzamt would probably make life easier for themselves and accept using the exchange rate from the date of the gift/inheritance as the "purchase" rate. And yes, if the exchange rate €/$ had fallen in the meantime, and less than a year had passed, that would generate a currency profit that would be part of "sonstige Einkünfte" and would have to be taxed with your personal, variable income tax rate.

 

Or you brave it out, tell the Finanzamt that the person who gave/left you the money had acquired that amount more than a year ago and that therefore the currency gain is tax free. 

Or even easier: only touch those $ after more than a year has passed ;)

 

2 hours ago, Straightpoop said:

I find all of this almost as bizarre on the insistence by the US that every US individual's "functional currency" is the USD regardless of where they live or what their "functional" currency actually is.  The US rules make every transaction in a foreign currency (from buying a company to buying a Happy Meal at McDonald's) a potentially taxable event thus making it practically impossible for any US citizen living abroad to ever be completely accurate on their income tax returns.  However, the IRS, to its everlasting credit, doesn't give a rip about such things.

 

Yes, looks like Germany took a page out of the IRS' book and is trying to enforce the € as the "functional currency", never mind the collateral damage and difficulty to adhere to this law for people who haven't lived all their lives in Germany.

 

If you read the conclusion (Fazit) of the Handelsblatt blog I linked to before, you will see that the author mentions one area where it's absolutely crucial to get the declaration correct, the Selbstanzeige with which a tax evader avoids criminal punishment.

The following sentence from that blog is about the Selbstanzeige:

"Von elementarer Bedeutung ist dies bei der nachträglichen steuerlichen Offenlegung von ausländischen Konten, da die Nacherklärung andernfalls unvollständig ist"

 

A Selbstanzeige, see §371 AO ensures no criminal proceedings if:

  1. it bares all instances tax evasion during the last 10 years, and
  2. if only 5% or less of the new declaration has errors (the 5% limit isn't fixed, in some cases they deny exemption from criminal punishment even if more than 95% of the declaration are error-free, see section cc) of the Bundesgerichtshof court ruling BGH 25.7.2011 StR 631/10)

But how are you supposed to make a full and error-free declaration if the law doesn't fit the reality on the ground, e.g. in cases like this where there is no prior purchase of the foreign currency from which to take the exchange rate? 

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Hi @PandaMunich and @Straightpoop,

Many thanks for your comments and discussion, I need to go over it several times and digest it.  There is a lot to  learn indeed. 

 

I have two situations:

 

First situation:

- I have some stocks, mutual funds and ETFs in the US

- I am not a US citizen but was working in the US at the time and so I opened a brokerage account (cash in this account earns interest just as it would as a bank savings account), transferred money in from my checking account and bought some stocks, funds, ETFs

- some of the dividends I reinvested, and then with the volatility of the market I decided to stop this and any dividends just went back to the money market cash account -> is this what you mean by interest-bearing USD account?  I don't understand why it influences the Spekulationsfrist?

- some of the purchases were made prior to 2009, while others (the bulk of my investments) were made post 1.1.2009.  German Tax Resident since 2010

- with the FA clamping down on Funds and transparency, I was thinking of just selling them all, but now is it better for me to wait till 10 years (if it's soon enough)?

 

Second Situation (actually it's my spouse's situation):

- German Tax resident since May 2011

- Stocks purchased in South Africa in Rand (ZAR) in June 2011 and sold in 2016

- Rand has depreciated so much since 2011 that even though there has been a gain in ZAR, overall it's flat in Euro.

All thoughts/comments appreciated.  Regards

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@Straightpoop

Please tell me whether you come to the same conclusions as I did below.

 

******************************

 

Ok, for your trades you used $ you made after becoming resident in Germany, so you have exchange rates that you can use --> you need to use alternative b from your post:

https://www.toytowngermany.com/forum/topic/212802-german-taxation-on-dividends-and-capital-gains/?do=findComment&comment=3501897

 

If by a money market cash account you mean that you bought/sold shares in a money market fund whenever you had money to spare/needed cash, then no, that falls under Veräußerungsgewinne/verluste (= "Einkünfte aus Kaitalvermögen", Anlage KAP, taxed at 25%) and does not count as interest-bearing. In that case the cooling-off period is 1 year.

 

A Tagesgeld account would be interest-bearing, in that case the cooling-off period would be 10 years.

 

However, it sounds like you were a heavy trader and re-used the same tranche of $ within a year --> you had taxable currency gains/losses (= Fremdwährungsgewinne/verluste, part of "sonstige Einkünfte", Anlage SO, taxable at your personal variable income tax rate).

 

Please look at the example with numbers in the Handelsblatt blog, and do the same calculation at every step for your situation.

Worst case, every transaction will mean taxable income created:

  • when you buy a stock/fund (also applies to that money market fund!), you "sell" $ to get it --> currency gain/loss to be declared in Anlage SO
  • when you sell a stock/fund (also applies to that money market fund!), you "buy" $ --> Veräußerungsgewinn/verlust to be declared in Anlage KAP and at the same time note down the €/$ exchange rate since it may matter for your next currency gain/loss (it will matter if you reinvest that tranche of money within a year --> another currency gain/loss)

This worst case will apply if you re-use the same tranche of money at a frequency of less than a year.

 

This still leaves the question, what "purchase" exchange rate to use for $ you used in a trade that began before you moved here, but which ended after you became resident here, e.g. for a stock/fund that you had bought before moving here.

I would suggest as a pragmatic solution looking up the €/$ exchange rate from that day and using that, never mind that you had actually earned these $ as an employee and not gotten them by exchanging € into $ like the first transaction in that Handelsblatt example.

 

Your spouse would also apply alternative b --> nearly no Veräußerungsgewinn to be declared in Anlage KAP.

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Thanks @PandaMunich

 Certainly, neither myself nor my spouse are heavy traders.  We made the investments and have simply kept them, and in some cases reinvested the dividends. I think I could quite easily prove that no dividend tranche of money was used for the purchase of another fund within one year, but instead that money came from transferring from my current account (also USD and from money earned in USD before moving to Germany). 

 

So if I have understood you correctly, you are saying that if:

a. the source account used to purchase the investments was not an interest-bearing account AND

b. it was not the same tranche of cash within 1 year period (using a FIFO method)

--> then I can use Alternative B at the time of selling the stock/fund/ETF and only have Anlage KAP 25% capital gains taxation.

 

Only if I reused the same tranche of cash within the 1 year period do I also need to note the exchange rate for the purposes of currency gain/loss, and file Anlage SO and be taxed at my personal income tax rate.  

 

I've bought stocks in USD before (post 2010 while German tax resident) and no Steuerberater has ever had me file an Anlage SO before. Any ideas why?

 

Regards

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@PandaMunich and @jasperdrm

 

Without (yet) going into the details of Panda's answer, I think the following might be helpful:

 

The first thing to realize is that whenever a German resident taxpayer buys and sells securities using a foreign currency cash account to make the purchase and to receive the proceeds of a sale, there are potentially TWO types of German taxable income that can arise:

 

1.  Normal gain and loss taxable as Kapitalerträge (25% Abgeltungssteuer + SolZ) under § 20 of the German tax code (ESt) computed by comparing the EUR cost basis with the EUR value of the proceeds.  According to my (current and latest) understanding of German tax law the computations of EUR basis and proceeds are done at the exchange rate in effect at, respectively, the time of purchase and time of sale - regardless of when where how and why the foreign currency that was used to effect the transaction was acquired.  From the "nice article" http://blog.handelsblatt.com/steuerboard/2014/09/12/fallstricke-bei-privaten-konten-in-fremder-wahrung/  cited by Panda:

 

Das Urteil des BFH vom 21. Januar 2014 hat in diesem Zusammenhang einiges klargestellt:

  1.  
  2.  
  3. Zur Ermittlung des Veräußerungsergebnisses nach § 20 Abs. 2 EStG beim Kauf und Verkauf von Wertpapieren über ein Fremdwährungskonto muss eine Umrechnung in Euro sowohl für den Kauf als auch für den Verkauf stattfinden, um das steuerlich zutreffende Veräußerungsergebnis festzustellen. Eine bloße Umrechnung des in fremder Währung erzielten Veräußerungsergebnisses in Euro ist nicht statthaft (zu § 17 EStG so schon BFH vom 24. Januar 2012 – IX R 62/10, DB 2012 S. 834 = DB0470076).

Gains or losses of this type are reported on Anlage KAP of your German tax return.  All you need to compute your gains and losses for each sale of a security purchased after 31.12.2008 is to find the historical EUR exchange rate applicable on the day to convert the purchase price into EUR and the exchange rate on the day of sale to convert the sale proceeds into EUR.  (Option b. as originally described.  In my opinion there is no permissible option a. )  There are several free websites offering historical cross-currency conversion rates that you can use to make the job easier.

 

 

2.  Foreign currency gains and losses taxable as a SEPARATE type of income under §23.  This one is a lot trickier and, as pointed out by Panda, much will depend upon the pedigree of the foreign currency funds used: 

 

A. whether they were "purchased" with EUR or have some other provenance such as being the proceeds from the sale of a security denominated in a foreign currency and

B. whether they were held in an "interest bearing account" immediately before or after being used to buy or sell a foreign security.  (I share Jasper's bafflement as to why this should make any difference, but the German legislature and courts seem to agree that the holding period that will make the gain or loss on foreign currency disappear or become taxable will be either 1 year or 10 years depending upon this fact.)

 

What will cause confusion for the FA (and others) is the definition of an "interest bearing account".  Typically, in Germany, securities are held in a "depot" and cash is held in a Verrechnungskonto (cash account) that functions as the "reference account".  There are usually (but not always, see:  Comdirect and Commerzbank) two separate account numbers.  In Germany, the cash account typically bears no interest.  The account holder has to direct excess cash on a cash account into an interest bearing account like a (separate) Tagesgeld account or buy some other security with it or use it to buy lunch for himself and the family at Wienerwald.

 

Brokerages in the US, however, almost always offer their clients something called a "sweep option".  If the customer chooses this option, all surplus cash above or below certain threshold will be "swept" into an interest bearing account automatically at the end of every banking day.  This "cash management" feature of US brokerages also offers different types of interest bearing sweep accounts:  the account could be a "money market account" - very similar to an interest bearing checking account but does not involve the purchase of money market funds.  Or, the excess cash could, in fact, be swept into various types of money market funds:  "tax free" government, regular garden variety, etc.  All these funds, of course, have a $1 per share value that never changes.

 

So, was any part of Jasperdrm's original cash deposit, reinvested or unreinvested dividends, proceeds from sales from an "interest bearing account" or not?  I have no clue.

 

Here, however, is what I believe is a comprehensive example:

 

1.  J earns $100,000 while in the US and before coming to Germany on 1/1/2009 opens a US brokerage account by writing a USD check to the brokerage for $100K.  When he opens the account J decides not to take advantage of any of the brokerage's sweep option so the USD are NOT in interest bearing account.  On 1 Feb. 2009 he buys 500 shares of a stock trading at USD 100 per share when the USD/EUR exchange rate is $1 = € .75.  Consequently, his EUR basis in the 500 shares is € 37,500.

 

No §23 German foreign currency gain or loss (apparently) takes place on this transaction because prior to this transaction his USD had (apparently) not yet acquired any EUR basis.  As of 1 Feb, however, $50,000 (Tranche 1 of his original $100K) are fated to acquire a EUR basis but $50,000 of his original wad remain pristine - i.e. without a EUR basis.

 

2.   On   1 July 2009 he sells his 500 shares for $125 each when the USD/EUR exchange rate is $1 = .80.  He has a §20 gain of € 12,500 ($100 x 500shares x €.75 = EUR 37,500 basis) and his proceeds were ($125 x 500s x € .80 = €50,000).  His $62,500 of USD proceeds from this transaction now have a EUR basis of €0.80 each and their holding period for computing any future foreign currency gain involving these funds begins on 1 July 2009.

 

He now has cash as follows:

$50,000  no EUR basis

$62,500  € .80 basis

 

 

3.  On  1 August he finds another hot stock and buy 1000 shares for $50 ea. or a total of $50,000 when the USD/EUR is $1 = €.85.  Because German ordering rules (now) mandate First In First Out (FIFO), the $50K used for this transaction is the $50K that still has no EUR basis.  As a result the purchase has no foreign currency consequences.   2 months later on 1 November 2009 he decides to cut his losses and sells all 1000 shares for $40 when the USD/EUR is $1 = €.90.  He has a loss computed as follows:  Cost basis:  $50 x 1000s = $50,000 x € .85 =  €42,500   Proceeds:  $40 x 1000x = $40,000 x €38,250  or a loss of € 4,250.  His 2nd tranche of $50,000 has shrunk to only $40,000 but each $1 has a € .90 cost basis and a holding period that began on 1 Nov 2009.

 

His USD cash position now looks like this:

 

$62,500 € .80 basis  (Tranche 1)

$40,000 € .90 basis  (Tranche 2)

 

4.  On 1 December 2009, he buys 1000 shares of stock at $31 ea. when the USD/EUR exchange rate is $1 = €1.  His total USD cost of the securities is $31,000.  However, because these USD have a EUR basis (€.80) and a holding period of less than 1 year, when he SPENDS those USD to purchase the stock he is deemed to have first sold them for their EUR cash value equivalent on 1 December.  $31,000 x €1 = €31,000 and then invested €31,000 in the stock.  Since his basis in the currency was $31,000 x € .80 =  24,800 he will compute a §23 foreign currency gain of €31,000 - 24,800 = € 6,200, declare it on Anlage SO and pay tax on it at his ordinary income tax rate.  His cost basis in the shares is, of course, $31,000 x €1 = €31,000.  His USD cash position on 1 Dec 2009 after the purchase looks like this:

 

$31,500 € .80 basis (remainder of Tranche 1) holding period beginning:  1 Feb 2009

$40,000 € .90 basis (Tranche 2) holding period beginning: 1 Nov 2009

 

5.  If he refrains from making any further purchases until after 1 Feb 2010, the 1 year period for exempting the remainder of Tranche 1 will have expired and he can thus make a purchase with those USD funds without triggering a foreign currency gain or loss.

 

If the facts of the above example were changed so that the USD cash account was INTEREST BEARING instead of interest-free then his holding period for avoiding foreign currency gain or loss would be 10 years from 1 Feb 2009 for the remainder of Tranche 1 and 10 years from 1 Nov 2009 for Tranche 2.

 

The example above assumes no dividends were paid during the time the shares were held.  If, however, they were paid in USD, their value would be converted to EUR at the rate in effect on the date of payment and (if not reinvested) the cash would go to the "end of the line" (FIFO) and be carried on J's "books" at their EUR value. The payment date would be their start date for determining the foreign currency gain or loss holding period. If automatically reinvested, the EUR value would be the cost basis of the shares purchased with the reinvestment and since the USD payment conversion to EUR and purchase all took place on the same day, there would be no currency differences that could trigger currency gain or loss on the purchase of the additional shares.

 

Anyhow, this is my (totally unqualified) understanding of the interplay between § 20 and § 23 of the ESt.  I would be happy to entertain your thoughts on the matter.

 


 
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4 hours ago, jasperdrm said:

 

I've bought stocks in USD before (post 2010 while German tax resident) and no Steuerberater has ever had me file an Anlage SO before. Any ideas why?

 

 

Because your Steuerberater has no understanding of what has been until recently a very obscure and poorly understood facet of German tax law.  Indeed, most such accounts and the transactions on them were never reported and so most Steuerberater would have no experience dealing with these types of issues.

 

This has all been a nasty surprise to me, too, and I've been dealing with the issue for years.

 

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Thanks @Straightpoop - great illustrative example!  Looks like I have some fun excel ahead of me. 

 

What about this situation - I had USD before coming to Germany in an interest-bearing account, bought stocks in 2011, sold them in 2016, and then simply closed the account and shifted the money back to my regular old savings account?  I'm not waiting out the 10 year period but I'm also not buying anything further, simply closing the account.  How would that be handled? 

 

Thanks once again.  Regards

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@Straightpoop

That answer is magnificent, an effort well beyond the call of TT's (unpaid) duty!

 

9 hours ago, jasperdrm said:

I've bought stocks in USD before (post 2010 while German tax resident) and no Steuerberater has ever had me file an Anlage SO before. Any ideas why?

 

4 hours ago, Straightpoop said:

Because your Steuerberater has no understanding of what has been until recently a very obscure and poorly understood facet of German tax law.  Indeed, most such accounts and the transactions on them were never reported and so most Steuerberater would have no experience dealing with these types of issues.

 

This has all been a nasty surprise to me, too, and I've been dealing with the issue for years.

 

Short answer: the Finanzamt only started generally enforcing it starting with 2015.

 

If you're interested in the background, read on, at your own peril (it's a long answer).

 

****************************************************

 

You first have to understand how the Finanzamt knows how to apply German tax law.

They don't get to interpret it themselves, but get each year from the top of their hierarchy, the BMF (= Bundesministerium der Finanzministerium = German Ministry of Finance) the following handbooks (which are also sold to the general public, they are very good value for money, the state certainly loses money on them, good quality paper and a nice hardcover):

  1. Einkommensteuer (general income tax law, applies to everybody): https://www.amazon.de/Amtliches-Einkommensteuer-Handbuch-2015-Bundesministerium-Finanzen/dp/3955541673/
  2. Lohnsteuer (wage tax for employees): https://www.amazon.de/Amtliches-Lohnsteuer-Handbuch-2016-Bundesministerium-Finanzen/dp/3083614160/
  3. Körperschaftsteuer (for taxing Kapitalgesellschaften, e.g. GmbH): https://www.amazon.de/Amtliches-Körperschaftsteuer-Handbuch-2015-Bundesministerium-Finanzen/dp/3955542122/
  4. Umsatzsteuer (VAT law): https://www.amazon.de/Amtliche-Umsatzsteuer-Handausgabe-2015-2016-Handausgaben/dp/3083617143/
  5. Abgabenordnung (contains all the regulations for stuff like objecting to a tax return (Einspruch), when and how a final tax return can still be changed (Korrekturen), and strangely enough, the criminal code pertaining to tax offences): https://www.amazon.de/Amtliches-AO-Handbuch-2016-Bundesministerium-Finanzen/dp/308362316X/

 

In each of these books, there are 3 sections (in fact, it's not 3 separate sections, but the Richtlinien and Hinweise are interspersed into the law, so you have: § of law, Richtlinie to that § and then Hinweis to that §):

  1. the law itself, i.e. the Gesetz
  2. then the Richtlinien, which is a more understandable (and longer) version of the law, with examples with numbers. 
  3. and the Hinweise, which are basically just keywords, with a short text for each keywords, and links to relevant BFH (= Bundesfinanzhof = Germany's highest financial court, it's located right here in Munich) rulings and BMF letters (= BMF Schreiben) with even longer examples for specific points of law

 

Of the above, only the law (Gesetz) is binding for the taxpayer, the Richtlinien and Hinweise are explanations and instructions by the German Ministry of Finance intended for the Finanzämter, and are therefore only binding to them.

However, unless a Steuerberater is keen on going in front of the Finanzgericht (= financial court) in order to attack a Finanzamt decision he doesn't like, he will also observe the Richtlinien and Hinweise.

 

While the Finanzämter only get their versions of the Handbücher once a year, the Steuerberater always have an up-to-date version of each (the Gesetz, Richtlinien and Hinweise get updated 3 to 4 times a year). These aren't bound books (after all you need to replace pages in it 3 to 4 times a year), but plastic folders colloquially called Backsteine (= bricks, since they are red and as heavy as bricks ;)), their official name is Loseblatt-Sammlungen, that contain annoyingly thin, translucent paper:

  1. Steuergesetze: contains all tax laws, i.e. for Einkommensteuer, Lohnsteuer, Körperschaftsteuer, Umsatzsteuer, Abgabenordnung and a few other tax laws: http://beck-shop.de/doi
  2. Steuerrichtlinien: contains all Richtlinien and Hinweise for the above tax laws: http://beck-shop.de/dof
  3. Steuererlasse: contains the most important letters by the German Ministry of Finance with even longer examples for specific points in questions (mainly the ones linked to from the Hinweise): http://beck-shop.de/dqx

 

The BFH ruling which started this whole problem was the one of 21.1.2014 BStBl. II S. 385 in which they say that selling a stock/fund and getting an amount in a foreign currency for it means:

  1. that stocks/funds are sold (this falls under §20 Absatz 2 Nr. 1 = Einkünfte aus Kapitalvermögen), and, that at the same time,
  2. the amount in foreign currency that you get for said stock/fund is "bought" (this being a foreign currency transaction, it falls under §23 Absatz 1 Nr. 2 EStG).

This BFH ruling found its way into the 2015 handbook (it was not contained in the 2014 handbook, therefore was not applied by the Finanzamt for 2014), as a link under the keyword "Fremdwährungsgeschäfte" in the Einkommensteuer-Hinweise.

--> That's why the Finanzamt didn't apply this interpretation of the law to the general population until 2015.

 

The law itself, §23 Absatz 2 Nr. 2 EStG has been ordering the taxation of currency gains made within a speculation period of 1 year (and the extension of the specualtion period to 10 years for interest-bearing foreign currency accounts) for much longer: http://www.buzer.de/gesetz/4499/al44688-0.htm

 

But until the BFH came along and started its strange theory that when you buy/sell stocks in a foreign currency, you generate a currency gain, and until that ruling found its way into the Einkommensteuer-Handbuch 2015 the Finanzämter had simply followed the common sense interpretation, that:

  • a profit on the sale of a share was simply the gain you made in that foreign currency, converted into € with the exchange rate on the day that you made the sale. 
  • a currency gain only was made the moment you actually exchanged the foreign currency back into €.
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Many thanks to you both. Really appreciate the insight and explanations. What I thought was a simple question led to an excellent discussion from which I learned a lot. 

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12 hours ago, jasperdrm said:


@Straightpoop

 

What about this situation - I had USD before coming to Germany in an interest-bearing account, bought stocks in 2011, sold them in 2016, and then simply closed the account and shifted the money back to my regular old savings account?  I'm not waiting out the 10 year period but I'm also not buying anything further, simply closing the account.  How would that be handled? 

 

 

I think it would have the same treatment as shown in No. 1 of the example I postulated above.  Assuming the funds had no EUR basis before the stock purchase in 2011 that purchase would trigger no foreign currency gain or loss.  Likewise the sale in 2016 by itself would produce only taxable § 20 gain or loss.  Although the USD proceeds from the 2016 sale now have a EUR basis, so long as they are neither converted to EUR nor used to make further stock purchases, the mere transfer to a savings account should not be a taxable foreign currency event.  While leaving them there protects them against § 23 gains or losses, the miserable rate of interest may convince you to find an opportune time to buy something more financially worthwhile and accept whatever § 23 consequences follow.

 

Since the USD/EUR rate is fairly stable and the amounts involved are modest, the § 23 gains or losses would probably be small to begin with and probably cancel each other out over time.

 

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@PandaMunich

 

Rats!  I was hoping you would come up with a devastating refutation of my new understanding of all this.

 

It is, however, somewhat comforting to realize that I was not alone in my ignorance but from henceforth I will have to toe a different line with my own financial affairs even if my local FA is initially left scratching its head at my "unnecessarily" complicated Steuererklärung.

 

Thanks also for the tip on inexpensive source material.

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@Straightpoop, with your excellent example above, I'm not sure reinvested dividends are "net zero" just because the dividend and reinvestment happen on the same day.  Given the FIFO principle, the reinvestment would effectively need to first use up any existing Tranches (probably at different exchange rates) while the dividend itself would go to the end of the line.  So each of those needs to be calculated individually too, and not just each purchase/sale.  Right?

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@jasperdrm

 

I see your point.  I suppose FIFO principles would require using whatever funds were in next in the queue rather than the funds that had just been distributed to you as a dividend - even if they were reinvested before they ever reached your cash account.

 

This just gets worse and worse, doesn't it?

 

 

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