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How do loss deduction, loss carryback and loss carryforward work?

Loss deduction, loss carryback and loss carryforward: How it works

Losses or negative income are primarily offset against positive income in the same tax year. This loss offset is first applied within the same type of income and then across different types of income – with no limit. If negative income remains after this offset, it can be carried back to the previous year or forward to subsequent years (loss deduction according to § 10d EStG).

1. Loss carryback to the previous year

If losses remain after offsetting in the year the loss occurred, they can be carried back to the previous year. Since 2013, the maximum limit for loss carryback is 1.000.000 Euro for individuals or 2.000.000 Euro for jointly assessed spouses. In exceptional cases (e.g. due to the coronavirus crisis), the carryback can also be extended to two previous years.

Example: If an entrepreneur incurs losses of 1.5 million Euro in 2023 and made a profit of 800.000 Euro in 2022, they can standardly carry back up to 1.000.000 Euro of the loss to 2022. Since their profit there is only 800.000 Euro, the tax burden for 2022 is reduced accordingly. The remaining 500.000 Euro loss can be carried forward to 2024. If the entrepreneur applies to limit the loss carryback, they could restrict the carryback to 800.000 Euro, increasing the loss carryforward to 700.000 Euro.

Coronavirus-related increases: As part of the coronavirus aid packages, the loss carryback for 2020 and 2021 was increased to up to 10.000.000 Euro for individuals and 20.000.000 Euro for jointly assessed spouses.

2. Loss carryforward to the following year

Remaining losses not offset in the previous year are carried forward to the following year. The loss carryforward is up to 1.000.000 Euro (2.000.000 Euro for married couples). If the loss is higher, the excess amount is only offset against up to 60% of the profit in the following year, so that at least 40% of the income is taxed.

Example: If an entrepreneur incurs a loss of 1.5 million Euro in 2023 and makes a profit of 800.000 Euro in 2024, this profit is fully offset against the loss carryforward. Thus, the taxable income for 2024 is 0 Euro. The unused loss of 700.000 Euro is carried forward to 2025.

Current developments in loss carryforward

From 2024, the limit for offsetting the excess loss carryforward will be increased from 60% to 70% of the remaining income. This regulation is temporary until 2027, after which the old system will return in 2028.

Loss deduction for specific types of income

Special regulations apply to losses from certain types of income. These losses cannot be offset against other types of income, but only within the same type of income.

• Private sales transactions (e.g. speculative gains according to § 23 EStG)
• Other income (§ 22 No. 3 EStG)
• Commercial animal breeding and husbandry (§ 15 para. 4 sentences 1 and 2 EStG)
• Commercial futures transactions (§ 15 para. 4 sentences 3 to 5 EStG)
• Tax deferral models (§ 15b EStG)

Example for private sales transactions: A loss from the sale of shares can only be offset against gains from other share sales, not against income from employment.

Special case: Losses from capital income

• Capital losses cannot be offset against other types of income. They are carried forward, and a carryback to the previous year is excluded.
• Share losses may only be offset against gains from share sales, not against other capital income such as interest or dividends.

Conclusion: Loss deductions help to mitigate financial burdens from losses. You can carry losses back to the previous year or forward to subsequent years. Note that losses from specific types of income can only be offset within the same type. If you have any questions, it is advisable to review the regulations carefully or seek tax advice.