Surprised by Unexpected Taxes on Fund Gains? Here's What You Need to Know
If you've been enjoying the growth of your investment portfolio without selling any shares or funds, you might be in for a shock come tax time. That's because now, even if you haven't realized a profit, you could still be liable for tax.
The New Rule
Starting in 2023, the German government will begin taxing theoretical gains on investment funds, including stocks and exchange-traded funds (ETFs). This new rule applies to profits that have not yet been realized through a sale, meaning that taxes will be withheld from your account, even if you don't actually have any money to pay.
Erich Nöll, spokesperson for the Bundesverband Lohnsteuerhilfevereine (BVL), explains that this taxation is based on the theoretical gain that would result from the fund's price performance and a basic interest rate. The custodian bank is responsible for calculating the profit and withholding the tax, which is then sent to the tax office.
The Problem with Withholding Tax
The key issue with this new rule is that the profits are not paid out as actual income, but rather remain as notional gains. This means that when the bank calculates the tax, it may deduct the amount from your account, potentially causing an overdraft.
The good news is that you don't need the bank's permission to deduct the tax from your account. However, this can still be a problem if you don't have enough funds to cover the deduction, leading to unnecessary overdraft fees.
How to Avoid Withholding Tax
To avoid withholding tax on ETFs and equity funds, investors can deposit exemption orders of 1000 euros for singles or 2000 euros for married couples assessed jointly with their investment advisors. By doing so, tax will only be withheld and deducted from the account if these amounts are exceeded.
Avoiding Double Taxation
Contrary to what some may believe, this new rule does not result in double taxation. The taxation of the advance lump sum is simply an advance taxation. If a profit is actually made on the sale of fund units at a later date, the tax already paid will be taken into account.
The Importance of Tax Planning
Given these changes, it's important for investors to consider tax planning as part of their overall investment strategy. This may involve adjusting their investment strategies, seeking advice from tax professionals, or minimizing their tax liabilities through other means.
Conclusion
The new tax rule for investment funds in Germany may be a surprise for many investors, but with proper planning and understanding, it can be managed effectively. By familiarizing yourself with the rules and taking advantage of available options, you can mitigate the impact of withholding tax and maximize your investment returns.
