Taxation on Income from Investments

2023-03-06 17:31:44

In this article, we’ll go over the various kinds of taxation on investment income, such as dividends, interest on deposits, debt holdings, P2P loans, sales of shares, cryptocurrencies, real estate, and several other investment vehicles.

Income from the investment categories mentioned can be divided into two groups:

  • Income from ownership, §8 of the Income Tax Act
    • Dividends (from securities, from company profits)
    • % of deposits, credit instruments, incl. P2P lending (Mintos, Twino, Viventor, Robocash, Viainvest, SavingStream, FundingSecure, EstateGuru, etc.);
    • Interest and other income from holding bills of exchange/promissory notes
    • Income from investment vouchers and coupons
  • Income from sales, §10 of the Income Tax Act
    • Income from the sale of securities (shares, bonds, bills of exchange, checks, bills of lading, investment vouchers and coupons)
    • Income from the sale of cryptocurrencies
    • Income from some P2P portals (Zonky, InvestAukce)
    • Income from the sale of real estate

In this section, we assess tax on foreign income from CFDs, FTEs, Forex, futures, options, stocks, debt securities, and others.

It is very important to correctly determine which income group your situation falls into since §8 and §10 apply to taxable income in different ways.

§8 Income from Capital

The incomes listed in §8 have one thing in common: they are the result of assets that investors usually hold for a long period of time, and are very often subject to withholding tax immediately before the income is paid to the investor.

The basis for calculating income tax on income in accordance with §8 is the gross turnover, without reducing the cost component. Only the % paid on a loan for the purchase of an investment instrument can be used as expenses (for example: if you borrowed 100,000 koruna at 3% and use it for equity lending through a P2P platform, from which you receive an income of 6%).

If the source of income payment is located within the Czech Republic, income tax “Srážková daň” is deducted from the income before payment. The investor should no longer indicate such income in the annual report since the tax on it has already been paid.

If the source of payment is located abroad, this income must always be reflected in the annual report and appendix No. 3 must be filled out. Tax paid outside the Czech Republic will be taken into account when calculating tax payable under Czech law if a double tax treaty is agreed upon with the source country. The investor must check the rate of exempted income tax abroad since foreign tax can only be credited within the limits of the rate specified in the double tax treaty.

In practice, there are situations when an investor is taxed an amount exceeding the rate established in an international convention. For example, in the USA and France, the tax rate on this type of income is 30%, however, according to the international convention, they are not entitled to take more than 15% from a Czech tax resident. To avoid this kind of problem, it is necessary to provide the broker with a confirmation of the Czech tax residence “Daňový domicil”, for overpaid tax, you can apply for a “Refundace” refund.

The offset of foreign tax is carried out for each country separately and it is necessary to attach confirmation from the foreign tax office (again, for each country separately). It is often difficult to get one. Fortunately, in practice, Czech tax inspectors also allow an extract from the stock exchange, from which it is clear that the tax has already been deducted.

§ 8 does not provide for tax losses, therefore, in case of a negative result, the tax will be 0 CZK. We only cannot offset a loss from our investment against other income in accordance with § 6 to § 10. We also cannot carry forward a loss to the next year.

§10 Miscellaneous income

§ 10 of the Income Tax Law contains “Miscellaneous income” which is not included in other sections or is expected to have a low frequency of generation or occurrence. Among many other incomes, this includes income from the sale of securities and income from the sale of movable and immovable property (this includes derivatives). § 10 is interesting in that the income specified in the first part of this article is exempt from tax if its amount does not exceed 30,000 CZK for the period of taxation. However, this restriction does not apply to investments (only for occasional activities and occasional leases on movable property).

The basis for calculating income tax on income listed in §10 is the difference between income and expenses directly related to receiving this income. Profit and loss can only be offset against one type of income. For example, the profit from the sale of ČEZ shares can be reduced by a loss from the sale of other shares. However, the profit from the sale of cryptocurrencies cannot be offset by the loss from the sale of securities, although both types of income fall under §10. As with income from §8, the result cannot be a negative difference and the loss cannot be compensated with other incomes §6 – §10.

Let’s look over the taxation of the most common income from investments in more detail.

  1. Income from the sale of securities

The taxable base for calculating income tax = income from sales (volume in the sale price) – the purchase price of the sold securities – additional expenses (commission to brokers and others).

This type of income has 2 variants for tax exemption. Income is exempt if:

  • The turnover of sales of securities during the reporting year did not exceed 100,000 CZK
  • The income from the sale was received for securities that the investor-owned for more than 3 years

The state wants to motivate citizens to invest in the long term. The tax test cannot be applied to derivatives. Even if we keep them for 10 years.

There may be situations when you have purchased shares or other financial instruments during the course of a year with several purchases. In this case, the FIFO (first-in first-out) method is used for taxation purposes – the oldest positions are sold first and then go out in order according to subsequent purchases. Or we can use the arithmetic average method (vážený aritmetický průměr) to determine the average purchase price. The latter method will be easier for many investors, as brokers often automatically indicate the average price of progressively purchased positions.

  • Income from collective investment (mutual funds)

A mutual fund pools money from different investors in order to collectively invest it through different financial instruments. It can be stocks, bonds, real estate, or others. The investor buys a share in the portfolio or several shares. The management company manages the funds of the mutual fund, which decides which securities or other assets to acquire, when to buy them and when to sell them.

This financial instrument is attractive because the investor does not pay taxes on dividends or sales of securities arising as a result of the management of the fund since this profit is mainly reinvested and will be reflected in the growth of the price of the investor’s share in the mutual fund. Thus, the investor recognizes income and pays tax only at the time of the sale of share certificates (§10 Miscellaneous income). As costs, you can use the purchase price and the costs associated with buying and selling shares. If the investor has held share certificates for more than 3 years or has received less than CZK 100,000 per year from the sale, this income is exempt from tax.

  • Income from collective credit-lending (P2P platforms)

Income, according to § 8, includes interest on granted loans. The marketing slogans of P2P platforms say: “People lend to people.” However, some P2P networks have chosen other legal relationships because they wanted to avoid the problems that can arise with direct lending between people under the Consumer Credit Act (ZSÚ, 257/2016). A great example is Zonky, where the relationship is not “individual-investor — individual-debtor” but “individual-investor —- Zonky —- individual-debtor” with Zonky as an intermediary. At the same time, the relationship between the investor and Zonky constitutes a derivative contract, which states: Participation is the means by which the credit risk of the Company is transferred from the Loan Agreement to the Investor. Participation functions practically as a credit derivative. This instrument is taxed in accordance with § 10 and not § 8.

As such, income from P2P platforms are in the sections below:

 § 8 — Mintos, Twino, Viventor, Robocash, Viainvest, SavingStream, FundingSecure, EstateGuru, Bankerat, Prestito et alii.

§ 10 — Zonky, InvestAukce and others.

It is necessary to carefully study and review the terms of a contract with a P2P network. If the agreement with the platform indicates that this is direct lending then see §8. If the loan contract is carried out exclusively between the company and the borrower, i.e. the investor has the right to participate in income and losses on the loan provided by the platform, then see §10.

Differences between §8 and §10.

In the event that you invest in buyback guarantee lending, there is no difference between the tax liability pursuant to §8 and §10. As such, the tax will be the same.

§ 8, however, is worse in that the investor cannot deduct the costs of acquiring investments from the income received. A typical example: on Mintos, we buy receivables without a buyback guarantee for 100 euros. The first installment of 5 euros comes, and then nothing comes and thus the loan is never returned. According to §8, the 5 euros are taxed as well as everything else (we cannot deduct a loss from the unpaid principal of 100 euros). According to § 10, we can offset the loss on the unpaid principal against profit (the loss can even be set off against income from other similar assets), which makes much more economic sense.

  • Bitcoin and other cryptocurrencies

Income from cryptocurrencies is taxed according to §10, i.e. like other income. As with securities, you can offset the cost of purchasing cryptocurrencies against the selling price, i.e. against proceeds from the sale of cryptocurrencies. There is no specific time frame for cryptocurrencies and all income must be reported on a tax return and is subject to income tax.

When to declare income from cryptocurrency:

  • Cryptocurrency exchanged into classical/traditional currency (FIAT)
  • Exchange of one cryptocurrency into another
  • Purchase of goods or services in exchange for cryptocurrency

We remind you that cryptocurrency mining is recognized as an entrepreneurial activity and requires obtaining an entrepreneurial license. Income from the sale/exchange of cryptocurrencies from mining is taxed as entrepreneurial income in §7 of the Income Tax Law.

You can read more about income from cryptocurrency in our article: ххх

  • Income from real estate

In the case of investment property, two types of income can arise:

  • Income from rental real estate (§9)

Only the amount of rent is considered income if utility bills are charged in advance and are recalculated upon consumption.

As an expense, 2 options can be used: a lump sum of 30% or real costs (depreciation of real estate, repair costs, purchase of furniture, insurance, and so forth). The investor may have a loss from rent that can be used over the next 5 tax periods. The loss from this type of income can compensate for the profit on other income, except for income from labor activity. You can read more in our article: xxx

  • Income from the sale of real estate (§10)

Tax exemption: 

  • 5 (10) years of ownership. Income from the sale of real estate is exempt from income tax if you own it for 5 years or more from real estate purchased before 2021. Properties purchased after 1 January 2021 must pass a 10-year ownership test for tax exemption. In the case of inherited real estate, the ownership of the testator in the direct line of kinship or spouse is also included in the period of ownership.
  • 2 years of residence before sale. Income from the sale of real estate is exempt from tax if immediately before the sale either you or your family members (children, parents) have lived in it for a minimum of 2 years.
  • Residence of fewer than 2 years. If you lived in a property for less than two years immediately before its sale, the amount of income received from the sale of the property, which you use for your own housing needs, is subject to exemption. This condition must be met before the end of the next tax period (according to the calendar year) in the case of an apartment or house, or within 4 years from the date of acquisition of a plot of land for the construction of a residential building. The repayment of a mortgage or a loan for the purchase of real estate for oneself, the settlement of the joint property of spouses or co-inheritors is also accepted as a solution to one’s own housing needs.

If you do not meet any of the exemption conditions, then you must report the income on your tax return and file taxes on it. Again, you can use acquisition costs and other direct costs against income. If you have previously received a property as a gift, the cost includes the price at which the gift was valued. In this regard, we recommend that you always prescribe the market price of the gift item in the donation agreement as this will help you avoid high taxes in the future.

In accordance with § 38g, a tax declaration/tax return is not submitted by an investor who has income only from employment (generally speaking an employee), and other income in accordance with §7 – §10 that does not exceed the amount of CZK 6,000.

Notification of Income Exemption (§ 38v)

If you have received an exemption from income tax in the amount exceeding CZK 5,000,000 per income, don’t forget about the obligation to submit a special Notice of Income Exemption. This obligation was introduced starting 01 January 2015. The notification is submitted within the deadline for submitting the annual report (by 1 April in the case of a paper version or an oral application to the tax office, by 1 May in the case of electronic submission, by 1 July when filing through a tax consultant).

Attention! Failure to notify is subject to a penalty of:

  • 0.1% of the amount of income if the obligation is fulfilled late, but before a summons or notice from the tax office
  • 10% of the amount of income if the taxpayer fulfills this obligation within the established tax period in the event of a summons
  • 15% of the amount of income if the taxpayer fails to fulfill this obligation even within the time period specified in the summons

Thinking about investment incomes can be quite a daunting task. We advise everyone to turn to specialists who will not only help you correctly calculate your income and reflect it in the report but, using all legal possibilities, save taxes for you.

DoMyTax employs a team of highly qualified specialists with many years of experience. Entrust your taxes to us.

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