The biggest enemy of your portfolio is the tax office. After all, you’re investing your savings from previously taxed income. Unfortunately, for realized gains in the market, you’ll be hit again with a 25% capital gains tax plus a solidarity surcharge. This adds up to a tax rate of 26.375% – in other words, out of a €1,000 profit, the tax office takes €263.75.

While there is an annual tax exemption of €1,000 on capital gains, savvy investors quickly exhaust this tax-free threshold.

In Germany, gains and losses in the portfolio only become tax-effective when a profit or loss is realized, meaning the security is sold. For a profit, your brokerage automatically withholds taxes and transfers them to the tax office. Losses are offset against gains and remain in a carry-forward account if losses exceed gains.

Tax Tip

If your realized losses in a calendar year exceed your realized gains, you can carry forward the loss to the next calendar year. This doesn’t happen automatically; you need to request it in your tax return.

You can offset this loss carryforward against future gains from securities transactions. However, you cannot offset regular income with the loss carryforward from securities transactions.

The stock market has a lot to do with psychology. A psychological advantage arises from not having to watch a significant loss position linger. In other words: Out of sight, out of mind. So, dear friends, get up, adjust your crown, and keep going.

Portfolio Cosmetics

As a long-term-oriented investor, I personally take a slightly different approach. The tax exemption is quickly used up through dividend payments. Until winter arrived, my brokerage deducted and remitted thousands of euros in taxes to the tax office.

Typically, every investor has a few underperforming stocks in their portfolio, shares that are 30%, 50%, or more underwater. Here, there is a small margin for maneuvering, a portfolio cosmetic procedure that professional fund managers also undertake towards the end of the year.

Turn the frog into a princess

In May 2021, I entered Exasol at around €19.00 per share. Gradually, I increased my position and lowered the average purchase price to €3.87. Nevertheless, I am still down by 30%. Others might say, the fool kept catching a falling knife.

Regardless, buying more at cheaper prices is not an option for now. The position would then be too large, and Exasol has yet to show significant progress. So, I sell the entire position and realize a substantial loss. The brokerage, or rather the tax office, subsequently refunds me 26.375% in taxes from my loss. Cash back in the coffers, I mean in the bank account.

On the same day, I buy back the same number of shares. The purchase price is exactly the selling price from the morning. Essentially, a zero-sum game. Not entirely, though; I now have the same number of shares as before, but also the refund from the tax office. A side note, the position is no longer at a 30% loss, but starts at zero.

Whether it was worth it will be seen; Exasol is a gamble. This cosmetic procedure works for all stocks in the red. Sell the position, realize the loss, take the tax refund, and buy back the position in the same size and at the same price. It doesn’t have to be on the same day, but as market conditions allow. With some patience, I could even buy back some positions at a lower price.

In the end, it’s a zero-sum game with taxes, a shifting of the burden. The stock market has a lot to do with psychology. Did I mention that already? A position deep underwater is annoying, especially if it’s in companies you believe in for the long term. This way, the stock has a chance for a fresh start. Sure, if Exasol now surges by 30%, I would have to pay taxes on the gains. But only if I realize the profit through a sale. I can also leave the position for another five years.