The Corana crash dragged down many ETF portfolios. Through sales and subsequent buybacks, losses can be used to defer tax payments without interfering with the long-term investment strategy. If you have a well diversified ETF portfolio and stick to your strategy during a stock market crash, you can still save taxes if book losses have accrued. Investors can realize this for tax purposes by selling exchange-traded index funds (ETFs) that are quoted below their purchase price and buying them back on the same day. The losses can be offset against future income from dividends, interest and sales profits. This reduces the tax liability.
Tax liability is postponed into the future
The realization of a loss through a sale and subsequent buyback does not lead to a permanent reduction in tax liability. Rather, the payment of the flat tax is postponed into the future. This suspensive effect can result in noticeable yield advantages. Capital that would be withdrawn from the portfolio through tax payments in the event of a rebalancing, for example, remains invested longer- and generates additional profits in a rising market.
Tax deferral increases profit
The exchange rate risk should not be underestimated either. Investors make either a small loss or a small profit when they buy back the securities, depending on whether they buy back the securities more expensively or cheaply. In order to avoid large deviations from the selling price, such transactions should only be carried out on stock exchange days when the price fluctuations are relatively small and the trading spreads between the selling and buying prices are small.
Investment tax reform obscures the view of profits and losses
Investors also need to be careful with ETFs and other securities that they bought before January 1, 2018. At that time, the new investment tax reform law came into force. The reform resulted in all old stocks being viewed as fictitiously sold as of December 31, 2017. Profits and losses up to this point are accounted for according to the old tax rules. At the same time, the market value of the end of 2017 was set as the new purchase price in the securities accounts.
Profits and losses that investors on securities accounts, relate solely to the period from 1.1.2018. It is essential to check before a sale and buyback to see what profits or losses have accrued in the period before. You can request corresponding receipts from security account for the fictitious sales, which will be available to you in your post box a short time later.
If fictitious profits are incurred, these are initially offset against the losses since 2018. Since there was no partial exemption prior to the reform of the Investment Tax Act, the sale of older equity ETFs can grow strange. It is possible that investors, even though they suffered an overall loss, will have to pay withholding tax because the profits count in full until 2017, but the losses since 2018 are only 70 percent.