Taxation of Financial Instruments – Part Two
Introduction
This article is the second 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, as well as the summary framework of the tax rates applicable to the main financial instruments.
In this second contribution, we examine the three tax regimes — declarative, administered, and managed — through which individuals declare and pay taxes on financial income, analysing their functioning, advantages, and disadvantages and comparing them. The methods for offsetting capital gains and capital losses are illustrated here according to how they operate under each individual regime, while the general rules on offsetting, together with further analysis of the taxation of harmonised ETFs and crypto-assets, will be covered in the next article in the series.
The Three Tax Regimes: Declarative, Administered, and Managed
Capital gains and capital losses on financial instruments (miscellaneous financial income) may be managed under three different tax regimes, governed by Articles 5, 6, and 7 of Legislative Decree no. 461/1997.
Declarative Regime (Article 5 of Legislative Decree no. 461/97)
This is the ordinary regime, automatically applicable when the taxpayer does not opt for either of the other two regimes. Under this system, the taxpayer is personally responsible for all tax obligations, as they must independently report in their tax return the gains obtained from financial assets and pay the related taxes.
The declarative regime is mandatory for transactions carried out through foreign brokers that do not act as withholding agents for Italian tax purposes, and for financial instruments that cannot be managed under the administered regime (for example, complex non-standardised derivatives, non-harmonised collective investment undertakings and ETFs, whose proceeds, as explained in the first part, contribute to total income for IRPEF purposes and are not subject to substitute taxation).
How it works
The taxpayer reports all financial transactions carried out during the year in their annual tax return (capital gains, capital losses, and other miscellaneous income). For investment income, such as foreign dividends received without the involvement of an Italian resident intermediary, reference is made to the first part.
The 26% substitute tax is calculated independently by the taxpayer and paid within the ordinary tax deadlines. For the tax rates applicable to individual instruments, reference is made to the table provided in the first part of this series.
Advantages
Possibility of offsetting capital gains and capital losses arising from financial instruments held under the declarative regime;
Maximum flexibility in portfolio management, including the use of foreign brokers;
Possibility of using capital losses arising from securities and financial instruments that cannot be included in the administered regime for offsetting purposes;
Liquidity advantage: the tax is paid in the year following the year in which the gain is realised.
Disadvantages
Complexity of compliance obligations: it is necessary to collect documentation from all intermediaries and calculate the tax due;
Additional costs: it is often necessary to rely on a professional for tax return preparation, with the related expenses;
Obligation to complete the RW section of the tax return for monitoring financial assets held abroad.
Administered Savings Regime (Article 6 of Legislative Decree no. 461/97)
This is the most widespread regime among Italian retail investors. A taxpayer who opts for this regime has the intermediary apply the substitute tax on each capital gain or other miscellaneous income realised, provided that the securities, units, or certificates are held in custody or under administration with banks, investment firms (SIMs), or other authorised entities.
The tax due is calculated and settled by these intermediaries on each capital gain or income received by the taxpayer.
In the event of termination of the relationship with an intermediary, any capital losses that have not yet been used for offsetting purposes may be transferred to the declarative regime or to another intermediary, provided that the first intermediary issues a certificate confirming the unused capital losses.
How it works
The option for the administered regime is exercised through written communication to the intermediary when opening the securities account (custody account). For existing relationships, the option must be communicated before the beginning of the tax period.
The tax is calculated and paid by the intermediary transaction by transaction, according to the realisation principle: taxation occurs when the capital gain is realised or when investment income is received (the settlement/value date of the transaction).
For non-resident taxpayers and for capital gains realised through the sale for consideration or redemption of units or shares of collective investment undertakings (CIUs), the substitute tax is applied by intermediaries even without an explicit option, without prejudice to the taxpayer’s right to waive this regime, effective from the first subsequent transaction (Article 6, paragraph 2, Legislative Decree no. 461/97).
For the calculation of capital gains, the purchase cost/value is determined using the weighted average value method.
Advantages
Simplicity: the intermediary acts as the withholding agent, relieving the client from any tax return obligations for income subject to this regime;
Exemption from the RW section (tax monitoring) for assets held with the intermediary;
Realised capital losses are automatically offset against subsequent capital gains within the same account relationship.
Disadvantages
The offsetting mechanism is limited to the same account relationship (securities account) held with the intermediary (Article 6, paragraph 5): automatic offsetting between accounts held with different banks or investment firms (SIMs) is not possible;
Capital losses can only be offset against capital gains realised subsequently.
Managed Savings Regime (Article 7 of Legislative Decree no. 461/97)
This regime applies to individual portfolio management services (GPM), where the client grants a professional asset manager (asset management company, investment firm, or bank) a mandate to manage their assets.
It is the regime that is fiscally most advantageous for certain categories of investors.
In the event of termination of the relationship with a manager, any negative management result not yet used may be calculated under the declarative regime, or within other administered savings or managed savings relationships held by the taxpayer, provided that the manager issues a certificate confirming the amount available for use.
How it works
Unlike the other two regimes, taxation takes place according to the accrual principle: the 26% substitute tax is applied to the overall net result accrued during the calendar year, determined as the difference between the value of the portfolio at 31 December and its value at 1 January, net of contributions and before withdrawals, after deducting management fees.
The management result includes both miscellaneous income (capital gains) and investment income (coupons, dividends, and income from funds) allocated to the portfolio, regardless of whether they have actually been received.
The tax is calculated and paid by the managing intermediary.
Income arising from government bonds and equivalent securities (Article 31 of Presidential Decree no. 601/1973) is calculated at 48.08% of its amount, resulting in an effective tax rate of 12.50% (Article 7, paragraph 4, Legislative Decree no. 461/97; see also the tax rate table included in the first part).
The exclusive advantage
The managed savings regime is the only regime that allows offsetting between investment income and miscellaneous financial income within the same managed portfolio.
This means that, under this regime, the coupon from a bond (investment income) can be offset against a capital loss on shares (miscellaneous financial income), thereby reducing the overall taxable base.
This is not possible under the other two regimes. It represents an exception to the general rule, mentioned in the first part of this series, according to which investment income and miscellaneous financial income cannot be offset against each other.
Negative Management Result
If, at the end of the calendar year, the net management result is negative, such loss is carried forward and deducted from positive results in subsequent years, up to a maximum of four tax periods.
The general rules governing the carry-forward of capital losses will be analysed in greater detail in a subsequent article in this series.
Advantages
The only regime that allows offsetting between investment income and miscellaneous financial income;
Taxation based on the net accrued result: the tax calculation also takes management expenses into account, thereby reducing the taxable base;
Full exemption from tax return obligations and tax monitoring requirements;
Loss carry-forwards do not require reporting in the tax return.
Disadvantages
Capital losses accumulated under the declarative or administered regimes cannot be transferred into the managed regime;
Tax is applied also to income accrued but not yet realised, without the possibility of deferring taxation;
The option is irrevocable for the current year and may only be revoked by 31 December, with effect from the following year;
It requires full delegation of management to a professional: it is not suitable for those who wish to retain direct control over individual investment decisions;
The contribution of securities into the managed portfolio is considered a sale for consideration, with possible immediate taxation of unrealised capital gains.
Foreign Currency Current Accounts and Deposits
Pursuant to Article 67, paragraph 1, letter c-ter) of the Italian Consolidated Income Tax Act (TUIR), capital gains arising from the sale or withdrawal of foreign currencies from a foreign currency deposit or current account are considered miscellaneous income.
These capital gains cannot be processed under the administered savings regime (Article 6, paragraph 1, of Legislative Decree no. 461/97, which excludes capital gains relating to foreign currency deposits) and must therefore be declared and taxed under the declarative regime.
The above-mentioned transactions contribute to taxable income only if the balance of current accounts and deposits held with all intermediaries, calculated using the exchange rate applicable at the beginning of the tax period, exceeds EUR 51,645.69 for at least seven consecutive working days during the relevant tax period (Article 67, paragraph 1-ter, TUIR).
Comparative table of the three regimes
