Loss Offsets for Crypto Derivatives and Forward Transactions in Germany

Whereas prior to 2021, it was possible to offset losses from forward transactions without restriction against income from capital assets, this is no longer possible due to the newly introduced Section 20 Para. 6 Clause 5 EStG:

1. Losses may now only be offset against gains from forward transactions and against income from covered option transactions.
2. In addition, as of 2021, the loss offset is limited to EUR 20,000 per year (for 2019 and 2020, the limit was even lower at only EUR 10,000).

Losses that have not been offset can, however, be carried forward to subsequent years, but even then, the amount of losses that can be offset is restricted to EUR 20,000 per year. This leads, in effect, to a minimum taxation of profits.

The law does not distinguish between traditional investments and modern variants in the field of cryptocurrencies and "decentralized finance." Accordingly, crypto investors trading derivatives and forward transactions on Binance, HTX, OKX, BitMEX, or other platforms and crypto exhcanges are also affected.

Because, as per Section 20 Para. 2 No. 3 EStG, this is income, the losses from these transactions can also only be offset to a limited extent. As a result, the minimum taxation creates such a high tax risk that these transactions become unattractive or even threaten the existence of many investors. This is because it is inherent in forward transactions that potentially high profits regularly face high loss positions.

It is more than questionable whether such taxation, which threatens the existence of the company, is constitutional. The German courts rightly take an extremely critical view of the statutory regulation. For example, in its ruling of April 26, 2023 (5 K 1403/21), the Cologne tax court ruled for share investments that the taxpayer must at least be left with the minimum subsistence level. The BFH goes one step further and considers the denial of the loss set-off restriction for forward transactions to be incompatible with the principle of equality and therefore unconstitutional (decision of Juns 7, 2024, VIII B 113/23). The Rhineland-Palatinate tax court had also previously ruled along these lines (decision of December 5, 2023, 1 V 1674/23).

If you don't want to rely on such vague case law, which is not readily adopted by the tax authorities in favor of the taxpayer, take the safe way out: one such safe way is to set up a trading GmbH. This company is generally permitted to offset losses from derivatives and forward transactions - a considerable tax advantage!

A GmbH always generates commercial income, so that the restriction on offsetting losses under Sec. 20 Para. 6 Clause 5 EStG can never apply. Similar restrictions for commercial income (Section 15 Para. 4 Clause 3 EStG) also do not apply in the case of a trading GmbH.

GmbHs that are structured as “financial companies” are even more favored. At the same time, this ensures that it is not subject to supervision from the German Federal Financial Supervisory Authority (BaFin). Because the restrictions to activities requiring a permit are fluent, careful planning is not the only necessity. It is often advisable to coordinate classification as a financial company with BaFin and obtain a "no action letter." This serves as confirmation from BaFin that a supervisory obligation does not exist. On the part of the tax office, it is advisable to obtain binding information, with which the tax office confirms that a restriction of loss does not apply to a trading GmbH.

It should be noted that the term “financial company” within the meaning of the KWG is not necessarily identical to that of tax law. Nevertheless, it may make sense to submit a corresponding letter of confirmation from BaFin to the tax office. Benefit from our expertise as one of the leading law firms in the field of cryptocurrency taxation and BaFin authorization procedures and save taxes with your own trading GmbH.

Our experts will gladly help you set up your own trading limited liability company. Founding such a company is carried out in 5 partly parallel steps:

1. The actual founding of a GmbH and, if necessary, legal structuring as a financial company, i.e.:

   • Drafting of a suitable limited liability company agreement

   • Drafting of a list of shareholders

   • Coordination of the desired company name with the Chamber of Industry and Commerce (IHK)

   • Forwarding the required documents to a notary you trust or to a notary's office in cooperation with us and the coordination of an appointment for you with a notary for the company founding

   • If necessary, (telephone) support for the notary appointment

2. Examination of the factual and legal situation with regard to the classification of your trading GmbH as a financial company in accordance with Section 1 Para. 3 of the German Banking Act (Kreditwesengesetz, KWG)

3. Contacting BaFin and drafting a letter to BaFin based on the results of the audit for the purpose of confirming that there is no supervision obligation

4. Drafting of an application for binding information to the relevant tax office with the aim of confirming that the trading GmbH is not subject to any restriction of loss—if necessary, submitting the no action letter from BaFin

5. Drawing up the necessary managerial service agreement, i.e.

   • Preliminary discussion (usually by telephone) to clarify your ideas regarding the drafting of the contract, incl. advice on typical tax and social security challenges

   • Drafting of an individual managerial service agreement

   • Review and, if necessary, revision of the draft contract