Taxation of income from the sale of securities

If you are an individual and have decided to sell your securities, this article is for you. Here you will find information about the taxes you need to pay on the profit you make.

Contact the specialists at 360WEDO for a personalized consultation; we will answer all your questions about taxation.

What Can We Count as Securities

In the Czech Republic, a security is defined in Articles 514–544 of the Civil Code. It is a document that is linked to a right in such a way that, after its issuance, it cannot be executed or transferred without this document.

A security is issued by an issuer, who raises funds for their activities through the sale of these securities. In return, the creditor (the owner of the securities) gains the opportunity to invest. The issuer is typically a company that issues shares or bonds.

However, the issuer can also be the government, which issues government bonds, or an individual (natural person) who can issue documents such as checks or promissory notes.

The most common types of securities in the Czech Republic include stocks, bonds, promissory notes, and checks.

A security can take three forms:

1. Bearer Security – The owner’s name is not specified on the document; ownership is granted to whoever holds the document.
   
2. Order Security – The owner’s name is indicated on the document, and the new owner can transfer ownership simply by signing the back of the security. The owner’s consent is not required.
   
3. Registered Security – The owner’s name is specified on the document, and a change of ownership can only occur with the issuer’s approval.

Additionally, securities can be classified into two types based on their format:

• Physical Securities – These are traditional paper securities.
• Uncertificated Securities – These exist only in electronic form and are registered with a securities center.

Exemption from Tax on Income from the Sale of Securities

To exempt income from the sale of securities from taxation, two criteria outlined in Act No. 586/1992 on Income Tax can be applied:

1. Value Test – According to § 4 (1) (t) of the Income Tax Act, income from the sale of securities is exempt from tax if the total amount for the taxpayer does not exceed CZK 100,000 in a given tax period. It is important to note that this refers to the total income from the sale of all securities within a calendar year, rather than profit (the difference between income and expenses) from those sales.
   
2. Time Test – Also under § 4 (1) (t) of the Income Tax Act, income from the transfer of securities is exempt from tax if the period between acquiring and transferring the security exceeds three years. In this case, only the duration matters, not the amount of income. If a taxpayer acquires securities through inheritance, the three-year period also includes the time during which the securities belonged to a direct relative or spouse who was the testator.

These two tests are separate and independent; they do not need to be satisfied simultaneously.

Therefore, if a taxpayer meets at least one of these criteria and has any exempt income, they do not need to report this exempt income on their tax return.

Taxation of Income from the Sale of Securities

If the income from the sale of securities does not meet any of the exemption criteria mentioned earlier, it must be reported on the tax return, and taxes must be paid. 

Income from the sale of securities is classified as “other income” under § 10 of the Income Tax Act (ZDP). The taxable base is calculated as the income minus any expenses directly incurred to generate that income. If the expenses for a specific type of income exceed the income itself, that excess is not considered. This means that the taxable base for other income cannot be negative; losses cannot be deducted from the statements.

However, within a single type of income (in this case, from the sale of securities), profits from selling one security can offset losses from selling another. Therefore, in your tax return, you will report the total taxable income from securities along with the total expenses incurred to generate that income, ensuring that the difference cannot be negative. The purchase price of the sold securities and any commissions related to their purchase or sale can be deducted as expenses.

If income and expenses from the sale of securities are in a foreign currency, they must be converted to Czech koruna (CZK) for tax purposes. The law provides two options for taxpayers who are not engaged in business activities and do not maintain accounting records, as outlined in § 38 (1) (b):

1. Use the exchange rate on the date when the income or expenses occurred, which is the daily rate announced by the Czech National Bank (CNB).
2. Use a uniform exchange rate announced by the Financial Administration of the Czech Republic on its website, typically published in January of the previous year.

It is important to note that these two methods cannot be combined.

What to Watch Out For

If a taxpayer qualifies for the exemption on income from the sale of securities, they do not need to include this income in their tax return. However, even in this case, they may still have another obligation that can be quite costly if not fulfilled: the notification of exemption. This requirement is outlined in § 38v of the Income Tax Act and must be submitted before the deadline for filing the income tax return.

The notification is separate from the tax return and does not have a specific “mandatory” format, but taxpayers can refer to sample documents available in the financial administration’s database. If a taxpayer is not required to file a tax return, they are still obligated to submit the notification by the standard deadline for corporate income tax returns.

According to an opinion agreed upon by the Czech Ministry of Finance, when reporting exempt income from the sale of securities, individual incomes throughout the year are not aggregated; instead, each income is assessed separately.

https://portal.pohoda.cz/zakon-a-pravo/finance-a-dane/zdaneni-prijmu-z-prodeje-cennych-papiru