you have to pay value-added tax when you shop at the supermarket. But even if you buy and sell an ETF share, taxes will be due. We explain how the calculation works and how you can save taxes.
Overview
If you want to get more out of your money, you should invest in etfs ("exchange traded funds"), experts advise. These are special funds that track an equity index like the dax.
These passive equity funds are particularly popular with newcomers to the stock market. Because: you can invest in companies all over the world with comparatively little effort.
Tax return
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Because there’s no need for a fund manager, there are also no high fees , which is good for returns, called yields . However, the state still wants a share of this – and collects it in the form of the so-called final withholding tax (Abgeltungssteuer).
What exactly that is, how they calculate the tax burden of their etfs and what has changed since the investment tax reform our overview of etfs and taxes shows you what has changed.
When do I have to pay tax on etfs?
In short: whenever your income and capital gains exceed the annual tax-free amount, also known as the savings allowance, of 801 euros per year (1.602 euro for couples). Then – on the income and capital gains that are above the 801 euro – the so-called final withholding tax becomes due.
It is currently 25 percent. In addition, there is the solidarity surcharge (soli) of 5.5 percent and possibly church tax of 8 to 9 percent, depending on the federal state. So you don’t pay tax only when you sell your ETF shares.
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The custodian automatically calculates the tax and transfers it to the tax office. If your earnings remain below the 801 euro or 1.602 euros, you will not pay any tax at all – provided you have placed an exemption order for the corresponding amount with your custodian bank. If not, you can still get back the overpaid money later through the tax return.
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What has changed as a result of the Investment Tax Reform Act??
With the investment tax law of 2018, the rules for taxes on etfs have changed. In this way, the state has significantly simplified what was once a very complicated taxation system. This is only important for you if you have already purchased an ETF share before 2018. The most important changes are:
- All funds are now taxed according to the same logic – with an annual tax rate of advance lump sum (see below).
- Investors can no longer offset the withholding tax on foreign dividends against the final withholding tax – instead, there is the so-called partial exemption (see below). Withholding tax applies if you earn capital gains abroad, for example dividends on distributing etfs. The tax is then collected directly by the respective states.
- The so-called Bestandsschutz falls away. This meant that investors who bought funds before the introduction of the final withholding tax in 2009 did not have to pay any tax on profits. This is over. All gains that accrued from 2018 onwards must now be taxed. However, an exemption amount of 100 percent applies.000 euros, which you can divide among several ETFs.
How does the tax on etfs actually work??
Like all investment funds, etfs are taxed every year with the help of the so-called "flat tax" advance lump sum taxed – and not only when you sell ETF shares, but also when you dividends received or capital gains the fund value at the end of the year is higher than the fund value at the beginning of the year.
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The upfront flat rate works like this: your custodian bank looks at the performance of your etf over the past year. Together with an interest rate determined by the bundesbank, it then calculates the advance flat rate. Taxes will then be due on this amount.
If you buy a fund share during the course of a year, the advance flat rate is reduced by one twelfth for each full month preceding the purchase. This also applies if you start a savings plan in the middle of the year.
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But no worriesnothing is taxed that has not been earned. In concrete terms, this means that if the fund value of your ETF falls – or no dividends are paid out – no advance flat rate is taxed.
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Once again for the back of your head: taxes are only due on your capital gains that are higher than 801 euro (resp. 1.602 euros for married couples).
In practice, you as an investor are in the clear: you don’t have to calculate anything yourself, the custodian provider does everything for you – including the transfer to the tax office. If you still want to understand how your tax on ETF is determined, we will explain it to you step by step in the following sections.
First the good news: you do not have to pay the final withholding tax on the entire advance lump sum (and in the case of distributing etfs on the dividend), but only on 70 percent of it. 30 percent remain tax-free. This is called partial exemption.
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This is how the partial exemption works – two examples
- Example 1: let’s assume you have invested in an accumulating, i.e. reinvesting, ETF and your custodian has calculated an upfront flat fee of 100 euro (details on the calculation can be found below). Since 30 percent of the dividend is tax-free, the final withholding tax only applies to 70 euros.
Let’s assume further that you are not in the church. Then the state would like to have 25 percent of these 70 euros in withholding tax plus 5.5 percent in soli, which makes a total of 26.375 percent 18.45 euro. - Example 2: on the other hand you put your money in a distributing ETF the calculation gets a bit more complicated, because the dividend is added to it. Again, let’s assume an upfront lump sum of 100 euros and a dividend of 70 euros. 30 percent of the dividend is again tax-free. This means that the 26.375 percent tax is only due on 70 percent of the dividend, i.e. on 49 euros. This makes 12.91 euro tax on the dividend.
A special feature in the case of distributing etfs: the dividend reduces the advance flat rate. If it is higher than the lump sum, the lump sum is 0 euro and only the dividend is taxed.
In our example, however, it is smaller than the advance lump sum. your lump sum shrinks from 100 to 30 euro (-70 euro dividend). This 30 euro is again 30 percent tax-free, so you only pay tax on 21 euro of it – that makes 5.54 euro taxes on the lump sum. Together with the tax on the dividend (12.91 euros), this results in an amount of 18.45 euro.
If you notice something? Exactly: the custodian bank ultimately transfers in both cases the same amount withholding tax to the tax office: 18,45 euro.
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Taxes on the sale of etfs
etfs can be inherited, but usually you will want to sell at least part of your etf at some point in time. Especially if you own an accumulating ETF – otherwise you would never get the benefit of the income.
You should know this: when you sell fund units, you have to pay the final withholding tax again. But don’t worry: the taxes that have already been withheld from the advance lump sums are deducted from the sales proceeds. You do not pay double tax on this amount. The remaining proceeds are then tax-free again at 30 percent (we remember: the partial exemption).
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This is how you calculate the upfront lump sum
Let’s go a little deeper into the details. you now know that withholding tax is only due on a part of the advance lump sum and, if applicable, the dividend. But how exactly does the pre-exemption lump sum actually work??
Reminder: your custody account provider will calculate the advance lump sum for you. so you don’t really have to worry about it. If you want to become a complete expert – go ahead!
In order to determine the upfront flat rate, your custodian provider must first calculate the so-called BASE YIELD calculate. And according to this formula:
Base yield = value of the fund units on the first trading day of a year x prime rate x 0.7
If the base return is lower than the appreciation of your fund units, it serves directly as an upfront lump sum. If it is higher, the appreciation is considered a lump sum in advance.
The BASE YIELD (risk-free interest rate) calculated by the deutsche bundesbank on the basis of the interest rate structure data on the first trading day of the year. The Bundesbank has announced the following interest rates:
- To the 2. January 2018: 0.87 for tax year 2019
- To the 2. January 2019: 0.52 for tax year 2020
- To the 2. January 2020: 0.07 for tax year 2021
Let’s just calculate it for the year 2020. We assume that the value of your ETF on the first trading day of the year (2. January) at 10.000 euro. Your base return is therefore calculated as follows:
Base yield = 10.000 euro x 0.07 x 0.7 = 4.90 euro
Whether these 4.90 euros are already the advance flat rate depends on how your ETF develops in the course of 2020.
- Example 1: large increase in value. We assume that the value of your ETF has increased by 100 euros. This is significantly more than the base return of 4.90 euros. In this case the base yield serves as a lump sum in advance.
- Example 2: small appreciation. Let’s assume that your ETF has only increased in value by 4 euros. This is a little less than the base return of 4.90 euros. In this case, the increase in value serves as a lump sum in advance.
- Example 3: no appreciation. We assume that the value of your ETF has remained the same or even fallen. Then the advance lump sum is zero euros. You do not pay taxes.
Advance lump sum = base yield, if base yield< appreciation;
advance lump sum = increase in value if base yield> appreciation;
upfront flat rate = 0, if no appreciation
Accumulating or distributing ETF: which is better from a tax perspective?
Since all funds are taxed according to the same logic since 2019, it no longer matters – in terms of tax expense – whether an ETF distributes dividends or automatically reinvests them (reinvested). All funds are now equally "tax simple", as it is called in technical jargon.
This also means that you can now use any type of ETF for a savings plan without problems. As long as you place an exemption order with your custodian bank, this does not make you any more work (see above).
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Differences only slight
But not only the effort is the same, also for the actual taxes to be paid it makes almost no difference in the long run whether you invest in an accumulating or a distributing ETF. You mainly only pay different proportions of the taxable value increase at different times. This is due to the different logic of each etf.
With "thesaurierern" the compound interest effect is stronger, because earnings are directly reinvested, while "payouts" are higher do not save interest on dividends paid out. The profit of reinvesting etfs is higher as a result.
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However, in the case of reinvestors, taxes are only due on the so-called advance lump sum, whereas in the case of distributors – as explained above – taxes are due either on the dividend and on the difference between the advance lump sum and the dividend, or – if the dividend is higher than the advance lump sum – only on the dividend.
Tip: if your goal is to delay paying tax, you are currently slightly better off with reinvesting etfs. Whether this makes sense for you, however, depends on your personal situation. It can be advantageous to take income earlier in order to make ideal use of the tax allowance.
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ETF tax calculator
Admittedly: calculating taxes on ETF is complicated. it’s a good thing your custodian bank does it for you automatically.
If you still want to do the math yourself, you can get help: various online portals offer ETF tax calculators in which you only have to enter a few key figures – the amount of any distributions (dividends), the fund value at the beginning of the year, the fund value at the end of the year and the type of fund.