From 01/01/2020, the taxpayer-friendly case law under which losses from such transactions had to be recognised for tax purposes is no longer expected to apply. The background is that losses from shares are generally recognised for tax purposes in that they can be offset against gains from other capital investments. This is now set to end, as a new draft law for 2020 provides that the write-off of worthless shares from an investor's securities account will become irrelevant for tax purposes. For this reason, we recommend selling shares that are at risk of becoming worthless at a loss by 31/12/2019 at the latest, in order to still be able to use the loss for tax purposes.
Expiry of warrants
One of the tax changes scheduled for 01/01/2020 under the government draft of the Act on the Further Tax Promotion of Electromobility and on the Amendment of Further Tax Provisions ("Annual Tax Act 2019") concerns losses from the "expiry" of warrants. From 2020, the following will apply (§ 20 Abs. 2 Nr. 3 EStG draft):
"Income from capital assets also includes gains from forward transactions through which the taxpayer receives a cash settlement upon termination of the right or obtains a monetary amount or benefit determined by the value of a variable reference quantity. The expiry of an option is not deemed to be a termination of the right."
In other words: the case law favourable to taxpayers, under which losses from the expiry of options or warrants held as private assets must be recognised for tax purposes (including BFH 12.01.16, IX R 48/14; BMF 16.06.16, IV C 1 – S 2252/14/10001:005), will no longer apply from 01/01/2020.
Recommended action by 31/12/2019
If it is already foreseeable in 2019 that warrants are likely to expire worthless in 2020, it is advisable to carry out the disposal at a loss in 2019. In such a case, the tax office must still recognise the tax losses. An expiry in 2020 that cannot be recognised for tax purposes should be avoided at all costs due to the planned tax change.
Worthless shares
The second far-reaching tax change in the Annual Tax Act 2019 concerns shareholders whose bank writes off shares that have become worthless from their private securities account or sells such shares. From 2020, the following will apply (§ 20 Abs. 2 S. 3 EStG draft):
"A disposal does not include 1. the full or partial uncollectibility of a capital claim, 2. the write-off of worthless assets within the meaning of paragraph 1 by the office paying out the capital gains tax; 3. the transfer of worthless assets within the meaning of paragraph 1 to a third party, or 4. a loss of assets within the meaning of paragraph 1 comparable to numbers 1 to 3 of this sentence."
With this clarification, the legislator overrides the taxpayer-friendly ruling of the BFH (12.06.18, VIII 32/16) on securities, according to which the constituent element of a disposal depends neither on the amount of the consideration nor on the amount of the disposal costs. The BMF (10.05.19, IV C 1 – S 2252/08/10004 :026) has adopted this view.
In conclusion, if such losses are foreseeable in your case, a disposal in 2019 is strongly recommended.
Frequently asked questions
Frequently asked questions
Why should worthless shares be sold before the end of 2019?
As of 1 January 2020, the draft legislation (Section 20 (2) sentence 3 EStG draft) provides that the write-off or transfer of worthless shares will no longer qualify as a sale for tax purposes. As a result, losses from such transactions can no longer be offset against gains from other capital investments from 2020 onwards. Anyone anticipating a loss in value should therefore complete the sale by 31 December 2019 at the latest in order to use the loss for tax purposes.
How are losses from the expiration of warrants treated from 2020 onwards?
Under the Annual Tax Act 2019 (§ 20 Abs. 2 Nr. 3 EStG draft), the expiration of an option is, as of 01/01/2020, explicitly no longer deemed a termination of the right. As a result, losses from worthless expired warrants held as private assets can no longer be claimed for tax purposes. The previously taxpayer-friendly BFH case law (including BFH 12/01/2016, IX R 48/14) is overridden by this new rule.
Which BFH case law is overridden by the Annual Tax Act 2019 (Jahressteuergesetz 2019)?
Two taxpayer-friendly rulings are particularly affected: the BFH judgment of 12 June 2018 (VIII R 32/16), under which even the sale of worthless shares qualifies as a tax-relevant disposal regardless of the amount of consideration, and the judgment of 12 January 2016 (IX R 48/14) on the recognition of losses from the lapse of options. Both principles are to be statutorily inapplicable from 1 January 2020.
What is the recommended course of action for warrants threatening to become worthless?
If it is foreseeable that warrants will expire worthless in 2020, they should be sold at a loss during 2019. Only in this way will the tax office recognise the loss for tax purposes and allow it to be offset against other investment income. A worthless expiry in 2020 would be irrelevant for tax purposes.
Which events will no longer qualify as a tax-relevant disposal from 2020 onwards?
Under Sec. 20 Abs. 2 S. 3 EStG (draft), the following will no longer qualify as a disposal from 2020 onwards: the full or partial uncollectibility of a capital claim, the write-off of worthless assets by the paying agent, the transfer of worthless assets to third parties, and comparable losses. As a result, losses from these events can no longer be offset against investment income.