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In Germany, you have to pay capital gains tax on your profits from the stock market. Capital gains tax is 25% plus solidarity surcharge.

25% is a big portion of your profits that goes to the tax office. But you can save much of it with the hacks we share today.

We assume that you invest in ETFs that track broad market indices.

Hack 1: LIFO over FIFO

In this hack, you sell the younger ETFs first instead of the older ones. It's because the oldest shares most likely made the biggest profit. Hence, you pay higher taxes on older shares than younger ones.

If you save for decades, the difference in profits between the one you saved 30 years ago and the one you saved 10 years ago is almost four times. And you pay almost 40% more in taxes if you sell the oldest shares first instead of the youngest.

Example

Suppose you invest a 25k € lump sum after every 10 years. So, you invested 25k when you were 30. You invested 25k again when you turned 40. And your last 25k investment when you were 50.

Assuming an average annual return of 7% on your ETF (this is the performance in the past), the value of your investments when you turn 60 will be the following.

• In 30 years, 25k will be 190,306 €
• In 20 years, 25k will be 96,742 €
• In 10 years, 25k will be 49,178 €

Now, suppose you want to withdraw 100k every 10 years. To get 100k net, you must sell 133k worth of shares.

Here are the taxes you pay using the two methods.

• The tax paid if you sell your oldest investment (the one you invested when you were 30) is 29k €
• The tax paid if you sell your youngest investment (the one you invested when you were 50 and 40) is 21k €

As you can see, you paid around 8000 € more in taxes when you sold the oldest shares first. The tax difference increases with the increase in the invested amount.

So, it's smarter to sell the younger shares first.

How do you do it?

There are three ways to implement this strategy.

• Invest in different ETFs after a ten-year interval: Several ETFs track broad market indices. So, simply invest in different ETFs after a ten-year interval. For example, invest in the iShares MSCI World ETF for the first ten years, then in the Xtrackers MSCI World ETF for the next ten years, and so on. You can also change the investment period from 10 years to 5 or 8 or any other interval.
• Open accounts with different stock brokers: Invest with one broker for the first ten years, then with another for the next ten years, and so on. Investing with different brokers also reduces the risk of losing all your savings if the broker goes bankrupt.
• Transfer ETFs from one account to another: Suppose you are about to retire. Then, you can implement the strategy in this way. Open another account with the same or different stockbroker. Transfer the amount you don't want to withdraw into the new account (account 2). The transfer sends the oldest shares to the new account. So, you can sell the shares left in the old account (account 1) to save taxes. Next time you want to sell, transfer the shares from account 2 to 1, and so on.

Hack 2: Utilize capital gains tax allowance

The German tax office offers a tax allowance of 1000 € every year. This means you don't pay any taxes on the 1000 € of profits, dividends, or interest.

So, selling shares that total 1000 € of profit can save 1000 € in taxes every year. Do it for three decades, and you will save 30k € in taxes.

How do you do it?

• Before the end of the year, in December, check how much dividend and interest income you had in the year.
• If it's less than 1000 €, sell just enough shares to make a profit and fully utilize the tax allowance.

Example

Suppose you made 100 € in dividends and interest, and your one piece of ETF share increased by 10 €. So, you can sell 90 ETF shares to make 900 € of profit.

This dividend income and profit from selling ETFs is tax-free. After you sell the ETFs, immediately buy them back.

Hack 3: Open a stock broker account for each family member

You can multiply the tax savings in the hack-2 by the number of members in your family. So, if you are a family of 3 (you, your partner, and your child), you can save 90k € in taxes in 3 decades.

It's because the tax office offers a 1000 € tax-free allowance to each individual (including children).

How do you do it?

• Open a stock trading account for each family member.
• Invest enough under each family member's account so that it generates a profit of 1000 € per annum.
• Sell the shares worth 1000 € in profits tax-free at the end of the year.
• Reinvest the amount you sold immediately after selling to let the compound interest work.

You can open a free stock brokerage account with Scalable Capital* and Finanzen.net Zero*.

These are some of the many ways to save taxes in Germany (legally). You can learn more tax-saving tips and tricks in our guide on saving taxes in Germany.

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