The Bundesfinanzhof (BFH, Federal Fiscal Court) has rejected a reduction of assessed income tax on substantive grounds of equity despite high losses that could not be offset (BFH, judgment of 3 March 2026 – IX R 18/23, ECLI:DE:BFH:2026:U.030326.IXR18.23.0). In the Court’s view, § 163(1) AO (German Fiscal Code) does not provide relief from tax burdens that are consistent with the statutory purpose of taxation and were deliberately accepted by the legislature. A constitutional complaint against the decision has been filed under case no. 2 BvR 1298/26. The Bundesverfassungsgericht (Federal Constitutional Court) has not yet issued a decision.
Non-offsettable losses and taxation of the subsistence minimum
The central issue is whether equitable relief may be constitutionally required where losses from speculative investments cannot be offset against positive income for tax purposes and the taxpayer is left with less than the subsistence minimum after paying income tax.
Two proceedings must be distinguished in this context:
- In proceedings IX R 18/23, the BFH set aside the judgment of the Finanzgericht Köln (Cologne Fiscal Court) of 26 April 2023 – 5 K 1403/21 and denied the requested equitable relief.
- In a different set of circumstances, the Finanzgericht Baden-Württemberg (Baden-Württemberg Fiscal Court) held that a reduced tax assessment on grounds of equity was warranted (FG Baden-Württemberg, judgment of 17 July 2025 – 2 K 827/23).
- An appeal on points of law against the judgment of the Finanzgericht Baden-Württemberg is pending before the BFH under case no. IX R 27/25. No decision has yet been issued.
BFH decision in proceedings IX R 18/23
High income and substantial losses in the 2002 tax year
In the 2002 tax year at issue, the claimant earned total income of EUR 519,482. This included, in particular, positive income from letting and leasing. At the same time, she incurred substantial losses in connection with capital investments.
According to the findings of the Finanzgericht, the non-offsettable losses arose partly from share transactions and sales of equity interests and partly from writing options and other option transactions. In calculating the income from writing options, interest payable on loans taken out by the claimant to settle liabilities arising from closing transactions was also taken into account.
Due to the restrictions on loss offsetting applicable at the time, losses of approximately EUR 390,000 could not be offset against positive income from other categories of income. According to the claimant’s calculations, the assessed income tax, together with the capital losses and losses from private disposal transactions, left her with less than the tax-exempt subsistence minimum. In this regard, she relied on the basic personal allowance of EUR 7,235 applicable in 2002.
Application for a reduced tax assessment
The claimant therefore applied for a reduction of her overall tax burden on substantive grounds of equity pursuant to § 163(1) AO. The Finanzamt (Tax Office) rejected the application. Her subsequent action before the Finanzgericht Köln was successful.
However, the BFH allowed the Finanzamt’s appeal on points of law and set aside the Finanzgericht’s decision. In its assessment, the restrictions on loss offsetting relevant to the dispute were constitutional.
No scope for equitable relief
The BFH emphasised that § 163 AO is not intended to provide a general means of correcting a tax consequence intended by the legislature. Substantive inequity requires the taxation in the individual case to conflict with the principles underlying the legislation. By contrast, burdens that are consistent with the purpose of the statutory provision and were deliberately accepted when it was enacted cannot, as a rule, justify a reduced tax assessment.
The provisions restricting the offsetting of certain losses are based on the constitutional requirements established in the Bundesverfassungsgericht’s decision of 30 September 1998 – 2 BvR 1818/91. Since the BFH considered the relevant restriction on loss offsetting to be constitutional in the specific case, it found no scope for equitable relief under § 163(1) AO.
Diverging assessment by the Finanzgericht Baden-Württemberg
Option transactions in 2006 and 2007
The proceedings pending before the BFH under case no. IX R 27/25 concern a different set of circumstances. The claimants are a married couple. In 2006 and 2007, the husband earned option premiums from trading in call and put options.
If an option was exercised by the option buyer, the husband was required to deliver the shares in accordance with the option right. Because he had entered into short sales, he first had to acquire the securities. This also resulted in losses.
At the time, the option premiums were taxable as other income under § 22 no. 3 EStG (German Income Tax Act). By contrast, the losses from the short sales were treated as income from private disposal transactions under § 23(1) EStG. Under § 23(3) sentence 8 EStG in the version applicable at the time, the losses in question could not be offset against the option premiums in the tax years at issue.
Protection of the subsistence minimum in every assessment period
The married couple applied for a reduced tax assessment on grounds of equity pursuant to § 163 AO. The Finanzgericht Baden-Württemberg upheld the action and ruled that the tax burden for 2006 and 2007 could not exceed specified amounts in each year.
In the Finanzgericht’s view, the subsistence minimum must remain tax-free in every individual assessment period. An overall assessment spanning several years is insufficient for this purpose. If, in an individual case, a restriction on loss offsetting results in income tax being levied without a corresponding increase in the taxpayer’s ability to pay and thereby violates the subjective net principle, a reduced tax assessment under § 163 AO may be required.
The proceedings were preceded by a long-running dispute between the taxpayers and the tax authorities. In its decision of 18 April 2023 – IX B 33/22, the BFH itself had pointed to the possibility of equitable relief. It remains uncertain whether the decision of the Finanzgericht Baden-Württemberg will be upheld in the appeal on points of law.
Constitutional clarification remains pending
The constitutional complaint against the judgment in IX R 18/23 now also raises the question of whether the Bundesverfassungsgericht will define more precisely the limits on tax loss offsetting and the protection of the subsistence minimum. The first question is whether the constitutional complaint will be admitted for a decision. Pending a decision, the BFH judgment of 3 March 2026 remains authoritative for the tax-law assessment.
The parallel proceedings demonstrate that the relationship between statutory restrictions on loss offsetting, economic ability to pay, the subsistence minimum and equitable relief has yet to be conclusively clarified. Companies, investors and high-net-worth private individuals can have the implications of comparable circumstances assessed by MTR Legal Rechtsanwälte as part of individual tax law advice.
