Foreign currency gains in private assets: New developments, taxation of fixed-term deposits, and practical implications

Recent developments in Germany have raised significant questions regarding the taxation of foreign currency gains in private assets. The tax authorities have started subjecting currency gains from interest-bearing foreign currency deposits to withholding tax even where no actual currency conversion takes place (as previously reported in the FGS blog).

In its decision of 8 October 2025 (4 V 1436/25), the tax court of Rhineland-Palatinate expressed serious doubts regarding this administrative view on the taxation of fixed-term deposits in foreign currencies. The key issue is whether the repayment of a foreign currency investment may trigger a taxable foreign exchange gain as a transaction equivalent to a disposal. Given the widespread use of foreign currency investments, particularly in USD, CHF, GBP, JPY, NOK, CAD and AUD, this issue is of considerable practical relevance to many taxpayers.

The crux of the decision

The court expressed serious doubts as to whether the repayment of a fixed-term deposit in a foreign currency gives rise to a taxable capital gain.

In particular, the matter arising is whether there is in fact a separate repayment transaction and, if so, how a capital gain would be determined under the law. The question of how to determine the acquisition costs of a capital claim created by the taxpayer themselves also remains unanswered. In light of this, the tax court emphasises that the current administrative view may result in the taxation of purely mathematical, yet unrealised, currency gains within private assets. This is because, from an economic point of view, when a fixed-term deposit is repaid, the taxpayer simply recovers the foreign currency amounts originally invested. However, there is no actual realisation of the capital gains accrued against the EUR during the investment period. Rather, this is realised, if at all, only at the time of a subsequent actual conversion of the foreign currency. In the court’s view, this dry income taxation (taxation without an inflow of cash) appears to have fundamental uncertainty and may not be compatible with the ability-to-pay principle (pure book profit).

The tax court is particularly concerned about the risk of double taxation. If one were to follow the administrative opinion, currency gains could initially be relevant under Sec. 20 of the German Income Tax Act (Einkommensteuergesetz – EStG) (capital gains) and, upon the actual conversion of the foreign currency, again under Sec. 23 EStG (other income). The tax authorities are attempting to resolve this conflict by invoking the subsidiarity clause in Sec. 23 EStG and excluding the profit already covered under Sec. 20 EStG from the subsequent calculation under Sec. 23 EStG. Whether this solution is truly convincing, however, remains to be seen.

Applicability to other foreign currency investments

The reasoning of the tax court of Rhineland-Palatinate is not limited to fixed-term deposits. Rather, the key considerations underlying its decision – in particular the absence of a realisation event for tax purposes and the systematic classification of foreign exchange gains – suggest that the same doubts may equally apply to other foreign currency investments held as private assets, such as interest-bearing foreign currency loans.

The court's decision is likely to further fuel the debate surrounding the distinction that has been made, until now, between foreign currency balances and the actual capital claim. This is because the doubts highlighted by the tax court concern the taxation of purely mathematical currency gains without any actual conversion of currency. From an economic perspective, this could suggest that such changes in value should be attributed to the underlying foreign currency balance rather than to the capital claim itself.

This puts the entire administrative position on the taxation of interest-bearing foreign currency holdings and similar structures under scrutiny.

Practical advice

The court decision was issued in interim relief proceedings. The main proceedings are pending and being awaited with considerable interest.

Taxpayers with foreign currency gains would be well advised to keep tax assessment notices open pending a ruling by the highest court (by filing an appeal, requesting a suspension of proceedings and, where appropriate, applying for a suspension of enforcement). This applies in particular to cases where only mathematical currency gains have been taxed without any actual realisation event for tax purposes.

Conclusion

The decision by the tax court of Rhineland-Palatinate calls administrative practice into serious question. Given the high practical relevance of foreign currency investments, future developments are likely to be of considerable importance to many taxpayers and advisors. The situation should be monitored closely and procedural action should be taken.