German investors trading derivatives can finally breathe a sigh of relief as lawmakers plan to repeal a punitive tax rule on CFDs. The country’s ruling coalition is set to repeal the regulation, which restricted traders from offsetting losses against profits up to a certain limit.

The €20,000 loss offset limit impacted the tax liabilities of CFD brokers. Germany’s Traffic light coalition has now agreed to abolish this rule, retroactively applying the change to 2020, several local media outlets reported.

Fairer Tax Treatment

This decision could mean substantial refunds for those affected, finally allowing traders to fully offset their losses against gains from past years. The controversial €20,000 loss offset limit was introduced as part of Germany’s annual tax laws.

Under this rule, investors could only deduct losses from futures transactions, including CFDs, against profits up to the capped amount. Many traders, particularly those dealing with volatile markets like CFDs, were affected by this rule.

This repeal is expected to particularly benefit CFD traders, as CFDs are considered forward transactions under German tax law. Efforts to repeal this law have been in motion since June 2022, when the Federal Fiscal Court deemed the loss limit unconstitutional.

The court ruled that the €20,000 cap violated principles of equal treatment, as it unfairly limited traders' ability to offset their losses. Last year, the ruling coalition, led by the Free Democratic Party, formally committed to reversing the rule.

Commenting about the latest development, Jens Chrzanowski, the Director of XTB Germany, said: “The new taxation law applies to CFDs and eliminates the difference between CFDs and other leveraged instruments. As a result, all of them are now treated equally when it comes to taxation. The impact on CFD brokers was significant although it came with some delay. Looking at the data from Germany's CFD association, the drop in the CFD trading volumes reached over 60% in Q1 2023 compared to Q1 2022.”

What This Means for CFD Traders

CFD traders will now benefit from offsetting losses without a restrictive cap. They can apply losses from 2020, 2021, and 2022 against any profits they made during those years. Additionally, this repeal will affect future transactions. Germany’s decision to align its tax policy more closely with the realities of derivatives trading could make the country more attractive for investors in these instruments.

According to a report by Finance Magnates, the tax regulation was pushed almost secretly through the Bundestag during the 2020 Christmas holidays. The proposal was reportedly first introduced and then passed more than a year ago.

It limited investors' ability to subtract losses above the capped threshold from capital gains or any other positive income. Losses not offset can be carried over to subsequent years, but the limitation on the amount still applies.