Knowledge of tax issues is clearly beneficial for a small investor. ISMO PEKKARINEN / AOP
When I was a kid, my grandmother switched to shelf papers in closets for Christmas. It’s hard for me to imagine I’d ever reach that degree of humility, but there’s one type of paper I spend time with during the Christmas holidays: securities, in other words, equity investments. It is wise for an investor to do a Christmas cleaning of their investments, as cleaning can save a lot of money in capital gains taxes.
Why Christmas cleaning? Because the investor’s tax year ends at the turn of the year. During the Christmas break, you already know for sure how the year has gone and can make smart decisions accordingly.
First, a couple of explanations for the terms.
Capital income taxes are paid on income from wealth. A shareholder’s income includes capital gains on the sale of shares, as well as dividends paid by companies to their owners on the profits they make.
The capital income tax rate is 30 if the taxable capital income does not exceed 30,000 euros. For capital income in excess of € 30,000, the tax rate is 34. The tax rate is particularly high for small capital income of a few hundred or a thousand euros that a typical novice investor can imagine receiving. Therefore, all gimmicks should be used.
The very first tax trick is the so-called “tonne rule”.
The tonne rule is made above all to facilitate the work of the taxpayer. It completely exempts sales of less than one thousand euros.
In practice, the application of the tonnage rule works like this:
Let’s imagine that you have bought the shares of the stove company Harvia for EUR 500 in a book-entry account and now their value is a whopping EUR 2,000. Applying the tonne rule, you can sell Harvia shares tax-free for a maximum of EUR 1,000. The savings in capital income taxes will be 225 euros.
Please note that the tonne rule only works if there are sales of less than a thousand euros in total during the year. If you sold shares of the above-mentioned Harvia pot for 1001 euros, 225 euros and a ton of taxes would snap into the payment.
The second tax credit relates to tax deductions that can be obtained if you sell loss-making fund or equity investments. I’ve noticed that many novice investors are paralyzed in the face of failed investments, but if there are any in the portfolio (and who can’t find one?), You might want to consider selling them off.
Losses can be deducted from capital income, now even dividends or rental income. Losses are deductible for the next five years, meaning Christmas cleaning can be done even if there is no taxable capital income right now. If the loss-making stocks are still preferred, they can always be bought back, as long as you keep the odor gap for a couple of days. Without the odor gap, the taxpayer may suspect tax evasion.
The total cost of a sale and purchase is typically around 16 euros. If a loss is even a few hundred euros to be deducted, the trading costs and effort will be well compensated and you will get the loss out of your sight. However, please note that if you originally acquired a loss-making investment for less than € 1,000, or if the value of all your sales is less than € 1,000, the loss is not deductible. At this point, the “tonnage rule” applies in the other direction – to the detriment of the investor.
What about that practice?
The taxpayer and the banks have made it really easy. The bank sends the information about the sales to the taxpayer, and the taxpayer usually receives it correctly in the tax return – of course, the information needs to be checked.
It is up to the investor to ask themselves a couple of questions. Are there any loss-making investments in the portfolio, and if so, should they be sold? Or if you haven’t sold anything in a year, would you want to sell some profitable investments tax-free?
Finally, one more thing to consider. These tax losses do not apply to shares held in an equity savings account. An equity savings account is itself a kind of tax stunt, and one of its goals is to simplify taxation so that there is no need to think about such little ones.