Knock-out certificates are not futures transactions and losses from knock-out certificates are fully deductible for tax purposes. The Federal Fiscal Court (BFH) decided this in its ruling of December 8, 2021 (Case No.: I R 24/19).
Losses from futures transactions are fundamentally subject to a prohibition on offsetting and deduction according to § 15 Paragraph 4 Sentence 3 of the Income Tax Act (EStG). Accordingly, losses from futures transactions can only be offset against profits from such transactions in a very limited way. “The decision of the Federal Fiscal Court is therefore all the more important, as knock-out certificates are not considered futures transactions and losses can thus be tax-deductible,” says lawyer Michael Rainer, MTR Rechtsanwälte
In the underlying case, the plaintiff GmbH acquired Unlimited Turbo Bull certificates issued by a bank. As knock-out certificates, they were characterized by the ability to profit disproportionately from the value development of the underlying asset with a comparatively small capital investment. However, there was also the risk that the certificates could become almost worthless once the underlying asset breached a certain price threshold. The GmbH also suffered substantial financial losses with its certificates. However, the tax office did not want to account for the losses for tax purposes, arguing that they were subject to the prohibition on offsetting and deduction.
However, the BFH reached a different conclusion. The decisive factor for the prohibition on offsetting and deduction is whether a futures transaction exists. Futures transactions typically involve a transaction that is to be fulfilled only with a time delay. This typical postponement of the fulfillment date does not apply to knock-out certificates, the BFH explained. Instead, they are ordinary bonds that are transferred step by step against payment. The plaintiff received the certificates immediately upon payment of the purchase price. Even though the claim from the certificates depends on the development of an underlying asset, the BFH still concluded that this does not constitute a futures transaction.
The BFH’s ruling makes it easier to account for losses from knock-out certificates for tax purposes and could also be applicable to other certificates. Lawyers experienced in tax law can provide advice.
