Interest, gains on securities sales or fund sales and dividends are taxable capital income as income on capital assets. From the income, the bank deducts 25 percent withholding tax (so-called capital gains tax). Investment income up to EUR 1,000 per year is tax-free. With an exemption order, you can prevent the taxation of capital gains. We explain why and what you need to do about it.

Capital income, i.e. interest, dividends and profits from securities sales or fund sales, are subject to capital gains tax as income from capital assets. The tax is usually withheld at the source as a so-called withholding tax. The tax rate is flat-rate 25 percent. In addition, there is the solidarity surcharge of 5.5 percent and, if necessary, the church tax.

Banks and insurance companies in Germany pay the capital gains tax anonymously to the competent tax office. As a result, many do not have to specify the capital income in their tax return. Then the capital gains are taxed as a settlement. However, the prerequisite is that the capital income is credited to a custodian or account in Germany. Foreign financial institutions do not pay taxes to German tax offices.

There are cases where the installation KAP has to be filled in. You must complete the investment KAP if you have received capital gains on foreign accounts or deposits that have not yet been taxed in Germany but you reside in Germany. The same also applies to interest from personal loans or refund interest from the tax office.

It often happens that a foreign state withholds withholding tax on the capital gains. This is the case if you have foreign stocks or funds. The withholding tax varies from country to country. The German bank can often count 15 percent of this on the German withholding tax. The remaining amount may be refunded by the foreign state.

Sometimes the tax return does not have to be filled out, but it would be better to fill it out so that overpaid tax can be claimed back.

You should submit the installation KAP if you have not exhausted the lump sum. Actually, you can submit the exemption order to the account-maintaining bank. This justifies that up to an amount of EUR 1,000 no capital gains tax will be withheld from your capital gains. However, if you have several accounts, you must distribute the exemption orders among the accounts. Each account then needs its own exemption order. However, the savings lump sum of EUR 1,000 must not be exceeded. However, it regularly happens that the exemption order is awkwardly distributed and one account has entered too large an allowance, while the other still has an amount left. The withholding tax then paid too much can be reclaimed via the KAP plant and thus prevent the taxation of capital income.

Spouses can claim EUR 2,000 lump sum. If one spouse has EUR 2,000 capital gains and the other none, it is advisable that both of them can fill out their own investment KAP and thus reclaim the capital gains tax.

You can also apply for the so-called favorable examination (§ 32d paragraph 6 sentence 1 EStG). This is possible if the personal marginal tax rate under the income tax is actually below 25 percent. You apply for the cheaper check by completing line 4 of Annex KAP and then specifying your capital gains, the tax withheld and the amount of savings.

If the total taxable income does not exceed the basic allowance of EUR 10,908 per year, you do not have to pay taxes on your income and therefore not on the capital gains. In this case, you should apply for a non-assessment certificate from your tax office. This applies for three years and must be submitted to the bank. This then also deducts no withholding tax from the capital gains. If your personal circumstances change, you must inform the tax office.

If you have forgotten to apply for the non-assessment certificate, you can recover the tax paid with the capital gains tax return and thus prevent the taxation of capital gains.

The investment KAP-INV applies to investment shares held with a foreign bank or fund company. The reason for this is that the foreign financial institution does not pay withholding tax and thus the taxation of capital income is not guaranteed. Therefore, they are required to enter this investment income in line 19 of the Appendix KAP and in the Appendix KAP-INV. There you have to specify the complete distributions and capital gains for each individual fund. If fund shares/units have been purchased at different times, each transaction must be recorded in a separate column.

The investment KAP-BET, on the other hand, applies to investment income. Row 7 includes investment income. Earnings from shares also belong in line 8. From line 37, enter the capital gains tax withheld, the solidarity surcharge and the church tax. The line 16 is for the amount claimed for savings.

If you want to offset the profits and losses you have made at different banks, you must also fill in the investment KAP (line 12 and 13). This requires a certificate of loss from the bank. This must be applied for by 15 December of the tax year at the bank. Otherwise, the bank continues the loss in the following year and offsets it initially with new profits. If there is still a loss, this can be used in the following year and prevent the taxation of capital income.

At present, losses from the sale of shares may only be offset against profits from share transactions. However, this regulation is subject to review by the Federal Constitutional Court. In a letter dated 31 January 2022, the Federal Ministry of Finance issued a preliminary note to all tax notices relating to the loss offsetting restriction for share sale losses. Should the Federal Constitutional Court retroactively classify the regulation as unconstitutional, you can automatically expect a refund.

4. use tax certificate to fill in

At the beginning of the year, you will receive a tax certificate from the bank for the previous year, which you may have to request. It includes the amount of capital income, the capital income tax paid, church tax and the solidarity surcharge. It also shows in which line of the installation KAP the values are to be entered. You should use these for the entries in the tax return.