Taxes on share trading: how to do it and when to avoid taxation
Did you sell stocks or other securities in 2021? Then watch out for tax liabilities! The last two years have been quite busy on the capital markets. Many people have been selling their shares, fearing what the next developments in the coronavirus pandemic will bring. But now, at the start of 2022, tax returns are slowly starting to be compiled. So it's a good time to evaluate whether or not to include your income from shares sold in 2021. Our article will help you find the answer.
WHICH SHARE TRANSACTIONS ARE TAXABLE?
At the outset, it should be noted that the mere purchase and holding of shares, ETFs or other securities by an individual does not constitute taxable income, even if their value increases during the tax year. From a tax perspective, you are only dealing with shares that have changed hands and, if applicable, those from which you receive dividends.
SHARES AND SECURITIES IN
THE TAX RETURN OF AN INDIVIDUAL
So what is the situation for individuals who do not have shares included in their business assets?
EXEMPTION FROM TAXATION OF INCOME FROM THE SALE OF SECURITIES
One of the many amendments to the Income Tax Act introduced tax exemptions in cases where:
- Income from transfers of securities shall not exceed CZK 100,000 per year. Then it does not matter how long the tax subject has held the securities in question. Only the amount of the total income realised (i.e. the value of the sale, not the profit after costs) is relevant. All such income earned during the taxable period - the calendar year - is aggregated.
If the above limit is exceeded, there is another possibility to claim the exemption:
- Three-year time test. If you hold a security for more than three years, the proceeds from its sale are not taxable. The time test applies for each individual purchase and sale of stock.
If your income from the sale of shares exceeded CZK 100,000 per year and the sale of shares took place within three years of purchase, the securities transaction must be taxed.
CALCULATION OF THE TAX BASE
When calculating the tax base, you can apply the related costs to the income; in the case of shares, these are mainly the purchase price of the shares and stock exchange fees. Gains and losses on individual titles can be offset against each other.
If you buy and sell shares frequently, it is advisable to keep detailed records of the transactions so that the related purchase price can be assigned to the sales and the tax base can be easily determined.
THE TAX RATE ON THE GAIN ON THE SHARES AND WHERE IT BELONGS IN THE RETURN?
For taxpayers who have not included the shares in their business assets, the taxable income (i.e. the difference between the income earned and the related expenses) will be included in other income in the tax return under Section 10 of the Income Tax Act. The tax rate is 15%.
HOW TO TAX DIVIDENDS FROM CZECH COMPANIES?
The holding of shares is often associated with the collection of dividends. Even dividends received from Czech companies by an individual cannot be exempted from tax in any case. Such income is subject to a withholding tax of 15% - but this is withheld and paid by the person who pays out the profit shares. You, as an individual, receive the dividend on a net basis, so you do not have to deal with the tax liability any further.
TIP: If you're into investing, also read this article on how to tax cryptocurrencies. Trading virtual currency is governed by different rules than securities transactions. Thanks to the article, you'll quickly understand the difference.
Not sure how to prepare your tax return? Do not hesitate to contact us.