Taxation of Financial Instruments – Part Three

5 hours ago

7 min read

Introduction

This article is the third in a series dedicated to the taxation of financial investments held by individuals. In the first part we introduced the fundamental distinction between investment income and miscellaneous financial income, together with the summary framework of the tax rates applicable to the main financial instruments; in the second part we analysed the three tax regimes - declarative, administered and managed - together with their respective advantages and disadvantages.

In this third contribution we look at offsetting capital gains against capital losses, the taxation of harmonised ETFs and crypto-assets, before concluding with some considerations on choosing the most suitable tax regime.

Offsetting capital gains and capital losses

One of the most important levers for the tax optimisation of a portfolio is the correct management of capital losses realised on investments.

How offsetting works

When a financial instrument is sold at a loss, a capital loss arises that can be used to reduce the tax due on future capital gains. Offsetting operates exclusively within miscellaneous financial income: it is not possible to use capital losses to reduce investment income (coupons, dividends, income from funds). The sole exception to this rule is the managed savings regime, in which offsetting also operates between miscellaneous income and investment income, in the manner described in the second part of this series.

Practical example (administered/declarative regime)

1. Assume the following are realised:

A €2,000 capital loss from the sale of a UCITS fund unit (miscellaneous income)
A €5,000 capital gain from the sale of a share (miscellaneous income)

In this case, the 26% tax will be applied only to the difference: €5,000 − €2,000 = €3,000 → tax due: €780 instead of €1,300.

2. Assume the following are realised:

A €250 coupon from holding a corporate bond (investment income)
A €100 capital loss from the sale of a share (miscellaneous income)

In this case, the €100 capital loss cannot be offset against the coupon; the coupon will therefore be subject to withholding tax at 26% (since the reduced rate for government bonds cannot apply), and the capital loss can be used to offset miscellaneous income received in the future (within, and no later than, the fourth year following the year in which the loss was realised).

Carrying forward capital losses to future years

Capital losses that cannot be fully offset against capital gains in the same tax period can be carried forward to subsequent years, up to a limit of four tax periods. Once that period has elapsed, the tax credit is permanently extinguished.

Example: a capital loss realised in 2024 can be offset against capital gains realised in 2024, 2025, 2026, 2027 and 2028. From 2029 onwards it can no longer be used.

Practical limits and rules

Offsetting is allowed only between instruments generating miscellaneous income: shares, bonds, ETCs, certificates, derivatives;
Capital losses from harmonised ETFs and mutual funds (as they qualify as miscellaneous income) can offset capital gains from shares and bonds, but not gains from other ETFs/funds (which are qualified for tax purposes as investment income);
Under the administered regime, offsetting happens automatically within the same relationship held with the intermediary (art. 6, para. 5, Legislative Decree 461/97); under the managed regime, within the same portfolio management;
Under the declarative regime, offsetting is possible across all intermediaries with which a relationship falling under the same regime is held;
To transfer capital losses from one intermediary to another (under the administered regime), a tax certificate must be requested from the first intermediary and handed to the second.

The taxation of harmonised ETFs: a special case

ETFs (Exchange Traded Funds) have some particular tax features that are important to understand, since their hybrid structure generates income of both categories at the same time.

How ETF proceeds are taxed

When an ETF unit is sold (or redeemed), the result of the transaction splits into two parts:

Investment income → the positive difference between the redemption/sale value and the weighted average purchase cost. This income is taxed at 26% and is always positive (it cannot generate a capital loss).

Miscellaneous income → the difference between the actual consideration and the weighted average cost, net of the accrued investment income. It can be negative, generating a deductible capital loss (miscellaneous income).

Practical consequence: an ETF can never produce a capital gain as miscellaneous income. If it is sold at a profit, the profit is always investment income. If it is sold at a loss, a capital loss (miscellaneous income) arises, which can be offset against other capital gains from shares, bonds or certificates.

Distributing vs accumulating ETFs

For distributing ETFs, periodic dividends and coupons are taxed at the time of distribution as investment income (26%). For accumulating ETFs, there are no periodic distributions: taxation occurs only upon sale, with the advantage of benefiting from compound interest in the meantime.

ETFs investing in government bonds

When an ETF invests, in whole or in part, in government bonds or other public debt securities, a portion of the proceeds benefits from the reduced 12.50% rate. The eligible portion is calculated in proportion to the fund's average percentage of assets invested in government securities (the 26% rate is applied to 48.08% of the proceeds attributable to government securities, resulting in an effective tax rate of 12.50%).

Harmonised vs non-harmonised ETFs

Harmonised ETFs (compliant with UCITS Directive 2009/65/EC, established in Europe) benefit from the favourable tax regime described above. Non-harmonised ETFs (not compliant with the UCITS Directive, often domiciled outside the EU) are instead treated as non-regulated collective investment undertakings: their proceeds fully contribute to the taxpayer's total income for IRPEF purposes, with progressive taxation. Where a resident intermediary is involved, it applies a 26% withholding on account. On this point, see what was already discussed in the first part of this series.

The taxation of crypto-assets

Under art. 67, para. 1, letter c-sexies) of the Italian Income Tax Code (TUIR), a crypto-asset is defined as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”.

The same provision brings within the tax scope, as miscellaneous income, capital gains and other proceeds realised through redemption, sale for consideration, exchange or holding of the above crypto-assets, with the exception of exchanges between instruments having the same characteristics and functions.

The considerations below concern individuals holding crypto-assets outside the scope of a business activity; for the accounting treatment and tax rules for cryptocurrencies held by businesses, see our article Cryptocurrencies: Accounting Treatment and Tax Rules.

Cryptocurrencies are admitted under both the administered and managed savings regimes, although they generally pass through the declarative regime since, to date, few intermediaries offer such services. To this end, the option for the administered regime can also be exercised through non-financial operators authorised to provide services relating to crypto-assets, such as exchanges and digital wallet providers (art. 6, para. 1-bis, Legislative Decree 461/1997, which refers to art. 3, para. 5, letters i) and i-bis), Legislative Decree 231/2007), and not only through traditional financial intermediaries.

Income from crypto-assets and the applicable rate

Capital gains from the disposal of crypto-assets, under art. 68, para. 9-bis of the TUIR, are determined as the difference between the consideration received (or the normal value of the crypto-assets) and their cost or purchase value, which must be documented and evidenced by the taxpayer on the basis of certain and precise elements; where this is not possible, the purchase cost is assumed to be zero, resulting in a taxable base equal to the sale value of the crypto-assets disposed of.

It should also be noted that all income generated by crypto-assets is classified as miscellaneous income, and therefore this also includes income arising from their mere holding (e.g. proceeds received through staking).

Capital gains, proceeds and capital losses generated by crypto-assets follow the general offsetting rules described above and are subject to a substitute tax of 33% (raised from 26% by the 2025 Budget Law - Law 207/2024 - with effect from 1 January 2026), it being understood that the related capital losses can only be offset against capital gains and proceeds of the same type (art. 68, para. 9-bis, TUIR) and not against those realised on shares, bonds or other financial instruments. Until the 2024 tax period there was also a €2,000 allowance, which made capital gains and proceeds from crypto-assets tax-irrelevant up to that overall amount in the tax period; the allowance was abolished from 1 January 2025 (art. 1, para. 25, letter a, Law 207/2024), so that every capital gain, from the first euro, now contributes to the taxable base.

In order to optimise the tax burden, it is possible to obtain application of the 26% rate through two arrangements:

investing in euro-denominated stablecoins (e-money tokens under art. 3, para. 1, no. 7, of EU Regulation 2023/1114 - MiCAR), i.e. crypto-assets whose value is stably pegged to the euro and whose reserve assets are held entirely in euro-denominated assets with entities authorised in the EU;
investing in ETPs (Exchange Traded Products) that track the performance of one or more crypto-assets.

It should be clarified that, in both cases, this is not strictly a favourable rate on crypto-assets as such: euro stablecoins benefit from a special regime expressly provided for by law, while ETPs, being financial instruments traded on regulated markets rather than crypto-assets held directly, simply bear the ordinary 26% rate applicable to miscellaneous financial income (see the first part of this series).

Concluding remarks

The choice of the most suitable tax regime, among those described in the second part of this series, depends on the complexity of the portfolio, the number of intermediaries used, the investor's experience and the tax-optimisation objective pursued. As a general rule:

The declarative regime is suited to those who operate with foreign brokers, who hold positions with several intermediaries that they wish to offset globally, or who directly hold shareholdings and/or financial instruments not normally included under the managed/administered regime.
The administered regime is the most common and practical choice for the majority of investors who hold financial instruments with a single Italian bank or investment firm.
The managed regime is the most tax-efficient regime for those who entrust management to a professional, thanks to its unique ability to offset investment income against miscellaneous income.