17 June 2020
Understanding capital gains
A capital gain is a rise in the value of a capital asset that gives it a higher worth than the purchase price. A capital loss is incurred when the purchase price is higher than the sale price.
To be clear, a capital gain is not a return, because it is not realised until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year).
Calculating capital gains
It is fairly simple to calculate a capital gain: It is equal to the difference between the sale price and the purchase price. It may also be expressed as a percentage.
In this case, the difference between the sale price and the purchase price is divided by the purchase price:
Capital Gain (%) = (sale price – purchase price) / purchase price
Taxation of capital gains in Italy
The most recent capital gains tax reform was in 2014, when the Renzi Government implemented Law decree no. 66 of 24 April 2014 (also known as the IRPEF-spending review). This Decree raised the tax rate on capital gains from 20% to 26%.
When stock is purchased in several stages, the average price is calculated as the average of the prices of each purchase, weighted by the quantities purchased. If multiple sales and purchases are made on the same day, the average purchase price and the average sale price are calculated as the average price of each purchase/sale, weighted by the quantities purchased/sold.
The 26% tax rate applies to dividends on the individual shares, ETFs and mutual funds. There is, however, an exception: if the funds include Treasuries, 48.08% of this component is considered in the calculation of final taxation. This is because the capital gain on Treasuries benefits from a special tax rate of 12.5%, as do notes issued by regions, provinces and municipalities, in addition to bonds issued by international bodies like the World Bank and the EIB and treasuries of foreign countries included in the “white list”.