Financial pitfalls when investing money: What taxes do I have to expect?

In the corona year 2020, many investors took advantage of the temporarily favourable entry prices for share and fund shares, which is why the shareholder ratio is Historically high 12.35% rose — the record level of the dot-com era in 2001. What financial pitfalls, in particular taxes, should be considered so that an investment pays off in the long term?

Overview of capital taxation on investments

Private investors should keep the following tax aspects in mind when planning their personal wealth and investment:

• Withholding tax (formerly: capital gains tax)

Since 2009, a flat rate withholding tax of 25% has been levied on profits, interest and dividends from stocks, bonds, bank deposits and possibly also capital life insurance. In addition, there is the solidarity surcharge and, if applicable, church tax.

The flat rate withholding tax is, similar to income tax, a withholding tax. This means that German financial institutions automatically pay the tax to the tax office before the profit is paid out.

• Tax on equity funds

Profits from funds acquired before the introduction of the flat rate withholding tax remained tax-free only until the end of 2017. Since January 1, 2018, funds and index funds (ETFs) have been subject to the Investment Tax Reform Act. On the one hand, the new regulation means less effort for investors when filing tax returns, as domestic and foreign investment funds are taxed annually and on the basis of a lump sum. On the other hand, investors can no longer offset the so-called withholding tax, which has so far been accrued for foreign dividends, against the withholding tax.

In the case of equity funds with an equity share of at least 51%, a flat rate of 30% of all income is tax-free; in the case of mixed funds, the partial exemption is 15%. Open-ended real estate funds with a German focus do not account for tax on 60% of the profit. If the real estate fund's investment focus is abroad, even 80% of the income remains unaffected by the tax authorities. Investors then pay flat rate withholding tax, solidarity surcharge and, if applicable, church tax on all income that is not exempt.

For investors, this means that once an exemption order has been submitted to the custodian bank, taxation is automatic, regardless of the fund type. Another innovation is the abolition of inventory protection. Investors who bought funds before 2009 must also tax income from 2018. When selling, there is an allowance of 100,000 euros.

• Taxation of digital securities

In principle, income and capital gains of digital securities are also subject to the flat rate of withholding tax. If digital securities are held by the buyer himself or by unregulated trading platforms, any income must be disclosed in the income tax return. However, when digital assets are traded and stored via a domestic investment platform, the payment of the flat rate withholding tax is usually linked via technical and contractual systems.

Digital securities such as tokenized bonds offer advantages such as 24/7 tradability and low barriers to entry into previously illiquid asset classes, without investors having to forego the usual taxation processes. In contrast to cryptocurrencies such as Bitcoin, which require investors to deal with complex tax issues themselves or even hire an additional service provider to do so, the tax collection processes for tokenized shares are secure, convenient and legally compliant.

Tips for optimising taxes and returns on investments

To ensure that the return on an investment is not reduced by unnecessarily high taxation or administrative costs, it is important to consider a few saving tips:

• Sell old stocks tax-free

There is a special feature for capital gains from securities purchased before January 1, 2009: You can still sell them tax-free today. The rule “first in, first out” applies. This means that, in the case of partial sales, for example, the tax office regards the shares acquired first as the first to be sold again.

• Use a savings lump sum

For single people, 801 euros of investment income per year are tax-free. For married people, the tax allowance doubles to 1,602 euros. This savings lump sum must be applied for via an exemption order from the bank or via a non-assessment certificate from the competent tax office. Otherwise, the tax office will calculate the flat rate withholding tax on the entire investment income.

• Save withholding tax with the non-assessment certificate

For investors with low income but high investment income, the non-assessment certificate, which exempts them from withholding tax on investment gains, may be worthwhile. This is the case if the taxable annual income (including capital market income!) does not exceed the following amounts:

• For single people: 9,744 euros
• for married/partnered: 19,488 euros

Investors receive a non-assessment certificate from the tax office and must fill it out and forward it to their custodian bank in order to avoid automatic payment of withholding tax.

• Calculate gains and losses

Losses must also be realized from time to time when trading stocks. However, these also have a positive side: They can be claimed for tax purposes and offset against realized share price gains. As a result, the tax burden (withholding tax) is reduced. The bottom line is that there is a loss for the entire calendar year, this can also be carried over to the following year. On the other hand, other investment income, such as dividends, bonds or interest, is taxed separately. The tax office will not offset these against share losses.

• Save deposit fees

Investors usually invest too little time comparing custody fees and simply use their house bank's brokerage offer. However, since financial institutions, asset managers or discount brokers charge different fees and commissions for the purchase, sale and custody of securities or ETFs, it's worth taking a look at the fine print. Especially for private investors, because the rule of thumb applies: The lower the investment amount, the more the deposit fee influences the return. Depending on the deposit provider and deposit value, a annual savings potential in the four-digit range.

When investing in digital securities, custody costs are completely eliminated. Thanks to the extensive digitization of processes, Investment expenses and costs reduced to a minimum become. Blockchain technology makes global certificates superfluous. Purchased digital securities can be transferred quickly, cost-effectively and without the involvement of banks and other traditional financial service providers via the blockchain. In this way, up to 80% of the costs of a conventional securities issue can be saved.

Long-term (digital) investing pays off

Since tax issues can be extremely complex and legislation changes over time, it is highly recommended for investors to resolve specific issues promptly and expertly. If your own knowledge is not sufficient, it is better to consult a professional tax advisor in case of doubt to avoid unpleasant surprises when investing.

As part of minimizing costs or maximizing returns, investors should also question their own investment behavior. On the financial market, there is a saying: “Back and forth empties pockets.” This means that many transactions are always at the expense of returns due to fees incurred by financial institutions or online brokers.

A forward-looking, long-term investment strategy based on a diversified portfolio that balances out any market fluctuations is therefore recommended. Since both securities and tangible assets such as Have real estate digitally mapped, investors with a digital portfolio can make diversified investments and save costs at the same time.