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Capital Gains Tax Optimisation

My last trade of the year is to do a Capital Gains Tax Optimisation. Here is how to minimize your capital gains tax for this year:

Abundance is not only a state of mind (inner abundance). It also shows up in your outer abundance (see: What is abundance?) But to make the outer abundance appear, one needs to take action. E. g. by taking care of money and taxes. Today it is the last chance to improve the tax situation for this year.

In Germany, and most other countries as well, one got to pay a tax for interest, dividends, and earnings on the stock market called capital gains tax (Kapitalertragsseuer). The state takes out a quarter of it. That sounds a lot, but it is much lower than the income tax. Where the progression goes up to 54% if you have a decent income. The capital gains tax is almost a flat rate. In Germany, the first 800 Euros are not getting taxed. But above this amount, of every Euro you gained, you have to pay 25 Cent to the state. This tax gets calculated at the time you sell an asset and realize the margin. But you can write off losses against margin within the same year. That means, as long as you stay invested, no taxes apply.

2020 should have been a brilliant year on the stock market, for everyone who took a chance to invest in march, when all markets were collapsing. And now the markets are on the way to their levels from one year ago, some already reached, or exceeded old heights.

I analyzed my depot, and I found one of my stocks is 12% below the invested value. It is Nordic American Tanker. This is a chance to reduce the tax load for this year. First of all, I checked if there is still an ongoing downward trend for this stock.

Nordic American Tanker Downward Trend - Capital Gains Tax Optimization

And yes, it still keeps falling, the 6 months and 4-week downward trends are still active. But my long-term expectation is, that it will go up about 50% within the next year. The reasons are the end of lockdowns after vaccinations, and due to that, increasing demand for oil. If I sell it today and buy it back in January, I can save some taxes this year.

Capital Gains Tax Optimisation preconditions

Let's say, 100% was the initial investment in Nordic American Tanker. Due to a loss of 12%, there is currently only 88% of the invested amount left. If I sell it now, I can declare 12% as a loss. This means a tax reduction in this year of 3% of the initially invested money. But only, if I can write it off against realized earnings with my other assets.

Calculating the taxable earnings precisely is a difficult task in Germany, due to the ridiculously complex tax laws. But you only need to know, if the earnings were higher than the achievable tax reduction. A rough estimation is good enough for that. You need the following amounts:

Value of all assets in the depot (including cash) on Jan 1, this year:
- (subtract) value of your assets (including cash) on Dec. 31 this year:
- (subtract) what you paid in, deposits during this year:
+ (add) what you took out, payouts during this year:

= gross earnings

Due to the fact, that not the gross earnings, but only the realized earnings get taxed, you need to subtract all not realized earnings. To do so, you need to go through all your open positions. And calculate the sum of the not realized earnings. If your broker only displays the total earnings and realized earnings, you need to calculate the difference between them, to get the amount of the unrealized earnings. Now we can roughly estimate the taxable capital gains:

Gross earnings:
- (subtract) the sum of all unrealized earning of your current investments:
= taxable capital gains:

Does this amount exceeds the amount for the potential tax reduction including the tax-free earnings (800 Euros in Germany)? If so, it is worthwhile to go for such a trade. But keep in mind the trading fees. If you are only invested with 1,000 Euros and the broker charges 10 Euros per trade, you will have to pay the broker 20 Euros. But you gain a tax reduction of only 30 Euros. I do not consider it worthwhile in this case. An exception might be:

If you love your broker so much more than the taxman

I wonder what kind of letter George Harrison received, to write this love song for his taxman?

Source: Youtube

When does this Capital Gains Tax Optimisation make sense?

I only would do the trade, if the trading costs are less than 1/10 of the tax reduction. Anyway, you only shift the tax with this trade into a later year. Because you will reinvest 88% of the initial amount next year. And if it rises to 150% of the initial investment, you will have to pay taxes on the earnings between 88% and 150%. Which is 62% instead of 50% based on the initial investment. But in the meanwhile, you will gain additional liquidity. And you can write that off against other losses in the future. Or you may stay invested, so margins will not get taxed. And you have the chance to sell it with earnings in a year, where you remain below the free 800 Euros in earnings. Then these trades payout fully!

It is not a good idea to do this trade only for the sake of a tax benefit. Each trade should be profitable even without the tax benefit. The stocks of Nordic American Tankers are still in an unbroken downward trend. I expect to be able to repurchase them beginning of next year for a cheaper price. So, I will get some additional shares for the same money. That should already overcompensate the trading fees.

3 thoughts on “Capital Gains Tax Optimisation

  1. The qualified business income (QBI) deduction under Sec. 199A brought issues to the 2018 tax year that ranged from learning and understanding the new Code section to simply making sure the tax software was calculating the deduction correctly. Having made it through the 2019 tax preparation season, practitioners must now consider tax planning and issues for the 2020 season. This discussion does not review the basics of the QBI deduction but focuses instead on a few (but not all) of the specific issues to consider for tax year

  2. Pingback: Capital Gains Tax Optimisation – Vitality 4 Happiness

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The last trade of the year - Capital Gains Tax Optimization