Do I pay tax on ETFs even if I don’t sell?
Many investors assume ETF tax only happens when you sell. In some countries that is wrong: Germany levies a small annual advance tax (the Vorabpauschale) on accumulating funds, and Austria taxes deemed distributions every year — even if you never sell a single unit. The amounts are usually small, but the principle catches people out.
The short answer
It depends on where you are taxed. Distributing ETFs pay out dividends, and those distributions are taxable in the year you receive them — selling not required. Accumulating ETFs reinvest internally, so historically you paid nothing until you sold. To close that gap, Germany introduced the Vorabpauschale, a small annual advance tax, and Austria taxes ‘ausschüttungsgleiche Erträge’ (deemed distributions). So yes — in Germany and Austria you can owe a little tax each year without selling.
The big capital gain itself is still only taxed when you sell. The annual tax is a small prepayment that is later credited against your eventual sale tax, so you are not taxed twice.
Germany: the Vorabpauschale
The Vorabpauschale is a notional yearly return the tax office assumes your accumulating fund earned, calculated from a base rate (Basiszins) set by the Bundesbank — 3.20% for 2026. The formula is: fund value at the start of the year × 70% × base rate, capped at the fund’s actual price gain for the year. For equity ETFs a 30% Teilfreistellung (partial exemption) then applies, and the result is taxed at the flat 25% rate plus solidarity surcharge.
- If the fund fell in value over the year, the Vorabpauschale is zero — no advance tax that year.
- It is offset against your Sparerpauschbetrag (tax-free allowance, €1,000 per person). Many small investors owe nothing in practice.
- Your German broker usually calculates and withholds it automatically each January for the previous year.
Austria and other countries
Austria taxes accumulating funds annually on their deemed distributions at 27.5% KESt. For ‘steuereinfache’ (tax-simple) funds the figures are reported to the authorities and your bank handles it automatically. Most other European countries — and the classic capital-gains systems — tax ETFs only on actual distributions or when you sell, with no annual phantom tax on accumulating funds. Always check the rule for your country of tax residence.
Without an advance tax, accumulating ETFs would let investors defer all tax for decades while distributing-fund holders pay every year. The Vorabpauschale levels that out — it is a small prepayment, not an extra tax, and it is credited back when you finally sell.
What it means in practice
For a typical German small investor, the annual Vorabpauschale is modest — often a few euros to low tens of euros per €10,000 invested, and frequently fully absorbed by the €1,000 allowance. The key is not to be surprised: keep enough cash in your settlement account each January so the broker can withhold it, and remember the amount is credited against your capital-gains tax when you eventually sell, so it is never lost.
FAQ — ETF tax without selling
Do I really pay tax on an ETF I haven’t sold?
In Germany yes — the annual Vorabpauschale on accumulating funds. Austria taxes deemed distributions yearly. Distributing ETFs are taxed on their payouts. The large capital gain itself is still only taxed when you sell.
How much is the Vorabpauschale in 2026?
It is based on a Bundesbank base rate of 3.20% for 2026: fund value × 70% × 3.20%, capped at the actual price gain, then reduced by the 30% equity exemption and taxed at 25% plus solidarity surcharge. If the fund fell in value, it is zero.
Is the advance tax an extra cost?
No — it is a prepayment. The amounts paid through the Vorabpauschale are credited against the capital-gains tax due when you finally sell, so you are not taxed twice. It only shifts a little tax forward in time.
Can I avoid it with my tax-free allowance?
Often, yes. In Germany the Vorabpauschale is offset against your €1,000 Sparerpauschbetrag. With a filed exemption order (Freistellungsauftrag), many smaller investors pay no advance tax at all.