Knock-out certificates are not futures transactions and losses from knock-out certificates are fully tax-deductible. The BFH decided this in a ruling dated December 8, 2021 (File No.: I R 24/19).
Losses from futures transactions are generally subject to a prohibition on compensation and deduction pursuant to § 15 para. 4 sentence 3 of the Income Tax Act (EStG). Accordingly, losses from futures transactions can only be offset against gains from such futures transactions in a very limited way. “All the more important is the decision of the Federal Fiscal Court that knock-out certificates are not futures transactions and losses can therefore be tax-deductible,” says attorney Michael Rainer, MTR Legal.
In the underlying case, the claimant GmbH had acquired Unlimited Turbo Bull certificates issued by a bank. As knock-out certificates, they were characterized by the ability to disproportionately benefit from the value development of the underlying asset with only a small capital investment. However, there was also the risk that the certificates could become almost worthless once the underlying asset broke through a certain price threshold. The GmbH also incurred significant financial losses with its certificates. However, the tax office did not want to recognize the losses for tax purposes, maintaining they were subject to the prohibition on compensation and deduction.
The BFH, however, arrived at a different opinion. The decisive factor for the prohibition on compensation and deduction is whether a futures transaction exists. Futures transactions typically involve a deal that is to be fulfilled only after a time delay. This typical postponement of the fulfillment time does not occur with knock-out certificates, explained the BFH. Rather, they are ordinary bonds that are transferred against payment step by step. The claimant received the certificates immediately against payment of the purchase price. Even if the claim from the certificates depends on the development of an underlying asset, the BFH nonetheless does not view this as a futures transaction.
The BFH’s ruling makes it easier to recognize losses from knock-out certificates for tax purposes and is likely also applicable to other certificates. Attorneys experienced in tax law can provide advice.
