20/05/2022
By wizewebsite
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You have sold shares or units. What about taxes now?<

Perhaps you sold in March when the markets panicked, or perhaps you used the decline at that time to buy cheaply and take profits in a few months. More people now deal with the tax implications of selling shares or units than in previous years. Interest in investing rose sharply last year also due to almost zero interest on savings accounts.

If you made a profit last year by selling securities, you should pay tax on the profit. You even have to admit loss-making investments. However, there are two exceptions when the income is exempt and is not even reported in the tax return: either the total income did not exceed 100,000 crowns per year, or you sold the securities no earlier than three years after the purchase.

The rules for taxation of "income from the transfer of securities for consideration", which we will now describe in detail, apply to ordinary investors - that is, people who have not included securities in their business assets in the course of business.

Limit 100,000 CZK per year

You can use the first tax exemption when your income from the sale of all securities in a given calendar year did not exceed 100,000 crowns. It doesn't matter how long you've held the shares or units - even if it's just two months or even two days.

The income from the sale counts towards the hundred thousand limit, regardless of how much you actually made or lost on it. Attention: this is really income, i.e. the entire amount for which you sold the securities. In this case, the amount of profit is not decisive - this means that you cannot deduct the purchase price from the selling price. So even if you bought for CZK 100,000 and sold for just one crown more expensive for CZK 100,001, you will exceed the exemption limit.

All your sales in a given year are added up. The income limit of 100,000 does not apply separately only to a specific share or mutual fund, but to all of them together.

Example: During the fall of the markets in the spring of 2020, you bought one hundred shares of Erste (each for CZK 480) and one hundred shares of Komerční banka (each for CZK 500), during the October subscription you managed to buy eighty shares of Pilulka (each for CZK 424 ). In December 2020, you sold everything (Erste for 650 CZK per piece, KB for 630 CZK, Pilulka for 580 CZK). Your total income from sales was almost 175,000 crowns, so you do not fit into the 100,000 crown limit for tax exemption.

In the example from the previous paragraph, you cannot argue that you fit within the income limit for each of the three companies (65,000 CZK at Erste, 63,000 CZK at KB or 46,400 CZK at Pilulka). All income is assessed together. The argument that your real profit - the difference between the purchase and sale price - was "only" CZK 42,480 will not help you either. This will only play a role in the calculation of the tax itself, but not for the exemption.

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Deduction from the tax base:

Tax discounts:

You don't get any discounts even if you just transfer money from one mutual fund to another, even if they remain within the same investment company. "Even the exchange between funds is the sale of one security and the purchase of another," says Lucie Simpartlová, director of the Partners investment company.

Once the total income from the sale of all securities for a calendar year exceeds CZK 100,000, you cannot use the exemption even for the part below the limit. "So it is not true that the first CZK 100,000 is always exempt, and that only the part above the limit is taxed," emphasizes Simpartlová.

Example: In the situation we described three paragraphs above, you sold shares in 2020 for a total of 174,400 crowns. You did not fit into the one hundred thousand limit for tax exemption, so you will start the tax calculation with the entire amount of CZK 174,400 – not only with the over-limit part (CZK 74,400).

If you have exceeded the limit of CZK 100,000, check again whether you cannot - at least partially - use the second rule for tax exemption. This is the fulfillment of the so-called time test.

Three-year time test

Income from the sale of securities is exempt from tax even if the time between the purchase and sale of the same securities has reached at least three years. It's called a time trial.

Three years (36 months) are calculated for each individual purchase or sale separately. When you buy and sell sequentially, the rule called FIFO from English "first in, first out", Czech "first in, first out" applies. In other words: you always sell first what you bought first.

Example: In January 2017, you bought fifty CEZ shares, then gradually bought another fifty in July 2017, May 2018, July 2018, July 2019 and April 2020. Towards the end of last year – in November 2020 – you sold one hundred shares. You have met the condition of the three-year time test - and therefore the exemption from tax - because according to the mentioned rule you sold shares bought in January 2017 and July 2017.

You have sold shares or units. What now with taxes

When only part of last year's sales meet the time test, you'll only be taxed on the remainder - that which you held for less than three years.

Example: In January 2017, you bought fifty CEZ shares, then gradually bought another fifty in July 2017, May 2018, July 2018, July 2019 and April 2020. Towards the end of last year – in November 2020 – you sold two hundred shares. You only met the condition of the three-year time test - for tax exemption - with the shares purchased in January and July 2017, i.e. with the first hundred shares. The income from the sale of the remaining hundred units, bought in May and July 2018, you have to tax.

When shares are exchanged by the issuer itself - including their splitting or merger - the time test is not interrupted if the total nominal value of the shares is the same.

Concurrence of the CZK 100,000 limit and the time test

We have described two situations where income is exempt from tax. According to the General Financial Directorate, they cannot be combined. For a possible exemption, you can use either the CZK 100,000 limit or the time test.

According to the law, all sales in a given year count towards the limit of CZK 100,000 per year, regardless of how long you previously held the securities. It doesn't matter that you met the three-year time test for some sales. You cannot deduct the volume of such sales and thus fit within the limit.

Example: In April 2020, you bought Erste shares and Moneta shares. You then sold them all in December 2020, the total income from which was CZK 97,000. However, in December you also sold ČEZ shares, which you had already bought in January 2016 – the income from the sale was CZK 35,000. You did not fit into the 100,000 CZK limit for tax exemption, because your income from the sale of all shares last year was 132,000 CZK.

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If you do not fit into the 100,000 CZK limit, the time test comes into play. And thanks to it, you can exclude from the total "taxable" amount exactly what you sold after more than three years. Everything else will be "subject to tax".

Tax and returns on the sale of securities

Didn't fit within the limit of CZK 100,000 per year? And do you have at least some of the securities that you sold before three years left? In this case, you must share this with the tax office in your tax return.

"Non-exempt income from the sale of securities needs to be stated in the tax return even if you sold them at a loss - although the resulting tax will then be zero," points out Simpartlová.

Income from the "bribe transfer of securities" is reported in the partial tax base as Other income according to Section 10 of the Income Tax Act.

The resulting tax is then of course not paid on the entire income, but only on the actual profit. So you can deduct expenses from your total income. In other words: The tax base can be reduced by expenses "demonstrably spent to achieve it". This mainly means the acquisition (purchase) price of a share or share certificate.

You can also deduct related fees as an expense if you paid them separately. You end up taxing the profit—that is, the income after deducting expenses—at a rate of 15 percent. The so-called solidarity surcharge, which came into play for significantly above-average earnings in the case of income from employment or business, does not apply to securities. (Starting with income for the year 2021, however, even such a profit will not avoid an increased rate of 23% for the part exceeding 48 times the average monthly wage, i.e. roughly 1.7 million crowns per year).

Example: In the spring of 2020, you bought one hundred shares of Erste (each for CZK 480) and one hundred shares of Komerční banka (each for CZK 500), in October you bought eighty shares of Pilulka (each for CZK 424). In December 2020, you sold everything for a total of CZK 174,400 (Erste for CZK 650 per piece, KB for CZK 630, Pilulka for CZK 580). At the same time, in December you sold ČEZ shares, which you bought four years ago, for a total of CZK 35,000. Your total income from sales was 209,400 CZK, so you did not fit into the 100,000 tax exemption limit. However, only CZK 174,400 will be subject to tax, as sales that meet the three-year time test (CZK 35,000) are exempt from tax.

You can reduce the tax base by the purchase price and fees for both purchase and sale. For simplicity, in our example, let's count only with the purchase price. After deducting it, you will be left with a profit: you earned CZK 42,480 on the sale. In the end, you calculate 15% tax from this amount alone, so you have to pay CZK 6,372 to the state.

To determine the acquisition price, the rule that you sold the longest-held securities first (FIFO) is used again. An alternative is the weighted arithmetic mean - it can be more convenient, but at the same time complicates the use of the time test. We write about it in more detail in a separate article.

"For non-entrepreneurial natural persons, the law does not address this directly. We need to use a method that gives us the most reliable and correct result," says tax advisor Jan Tecl from EK Partners. "If it is not possible to connect individual purchases and sales directly, I prefer the FIFO variant for its simplicity. The weighted arithmetic average is relatively complex even for future records and the eventual defense of the holding period of the security for exemption," he clarifies.

Can both methods be combined for the same type of securities during the year? "The taxpayer should proceed consistently. Although the law does not prohibit the combination, it may subsequently be difficult for you to argue why you use FIFO for a given type of securities and the average for the rest," adds the tax advisor.

Profits and losses from different securities can be offset against each other. This means that if, for example, you had a profit of CZK 20,000 on the shares of one company, but you sold the shares of another company at a loss of CZK 8,000, your tax base will be reduced to CZK 12,000.

A retail investor cannot transfer a loss from one calendar year to the next and thus deduct it from future profit. Of course, you don't pay tax on a loss sale (it's not a profit), but that ends its "tax benefits" for you.

Which exchange rate to use

If you bought or sold in foreign currency, you can use the unified conversion rate of the CNB, which is published by the Financial Administration at the beginning of the following calendar year. It is actually the average of the courses for the previous calendar year.

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Do you want to invest smartly? We will find the optimal solution for you.

I want to invest. I want to create a reserve for the children. I want to fulfill my dream. I want to save for retirement.

However, it is not possible to combine both courses within one calendar year.

We write in more detail about the use of the exchange rate in a separate text.

Notification of exempt income

In your tax return, you do not include income that is exempt from tax at all - whether it fits within the limit of CZK 100,000 per year or meets the three-year time test.

However, watch out for one exception: When the exempt income exceeds five million crowns, you must report it to the tax office. In this case, each income is assessed individually, not as the sum of all exempt income for the year. Thus, a small investor will exceed the limit only exceptionally.

This is not done in the tax return, but in the form of a separate notification. This is not binding, however, you can use, for example, a form on the website of the Financial Administration. The deadline is the same as for the tax return for the calendar year in which you received such exempt income (regardless of the fact that you do not have to file a return at all).

Taxation of dividends

Taxes must also be paid on dividends. It is much easier for companies based in the Czech Republic - officially "domestic tax residents". Their dividends are automatically taxed at 15% withholding tax. The joint-stock company that paid them to you will take care of it directly. You will therefore receive the amount after tax. You don't report any of this on your tax return.

It is more complicated with income from abroad, for example with dividends from American or perhaps German stocks. Small investors tax them as income from capital assets (Section 8 of the Income Tax Act), and they are also subject to a 15% rate. How to limit the risk of double taxation, i.e. once abroad and secondly in the country?

"In the first stage, you need to find out in which country the company that paid you the dividends is resident (headquartered). Subsequently, find out whether we have concluded an agreement with the given country on the avoidance of double taxation - an overview can be found on the website of the Ministry of Finance of the Czech Republic. If such an agreement is concluded, it is necessary to look at where the income from dividends is to be taxed (usually Article 10) and at the same time it is necessary to look at the article dealing with the avoidance of double taxation (usually Article 22 or 23)," explains tax advisor Jan Tecl from of EK Partners.

"Usually, simple crediting is used as a method of avoiding double taxation, and it is necessary to state dividend income in the gross amount, not reduced by foreign (withholding) tax, in the Czech tax return. Tax withheld abroad can be offset (usually in full) against the Czech tax liability if you have a confirmation from a foreign tax administrator. In justified cases, it is possible to prove this withheld tax by confirmation of the payer of the income or by the depositary," clarifies Tecl.

"If you are not able to prove the tax paid abroad, it is not possible to count it against the tax liability in the Czech Republic," he adds.

How to do it

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Prepare a complete tax return online with us in 15 minutes, without registration and anonymously. For the price of one movie ticket. You still have to submit your tax return:

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If you just want to download the forms, continue to tax forms* If you file your tax return electronically, you still have a month to go this year. But why put it off.

Petr Kučera

Editor-in-chief of the website Peníze.cz. It focuses on a wide range of personal finance and consumer topics. He graduated from the Faculty of Law of Charles University in Prague, but he likes the media even more than paragraphs. He led the coverage of the Czech... More articles by the author.