Assets that work for themselves, with the aim of maximising profit while minimising risks – that is the ultimate plan for any investor. How to implement it without any tax hiccups? The financial market does not operate in a vacuum, solely on the basis of outcomes and indicators, but within the entire system of law, including indeed tax law. Thus, making investment decisions requires an extensive analysis of not only financial and legal but also tax related factors.
Verification of the latter may be particularly important against the recent strong fluctuations in the financial markets. The lack of a sense of security is apparent not only in the figures, but also in the withdrawal of funds from trading by reputable investors. The relinquishment of conventional passive income is a symptom of destabilisation and rapid fluctuations, and therefore of the high risks surrounding investing. On the other hand, the awareness of and willingness to compound wealth through investing is becoming increasingly widespread.
As one of the common investment strategies, the diversification of one’s portfolio allows for a reduction in investment risk and an increase in long-term appreciation potential. That is due to the varying nature of the characteristics of individual assets and the extent to which they respond to shifts in the market. Therefore, even when some of them depreciate in value, others might increase in value, which, in the long term, allows a profit to be made notwithstanding the volatility in the valuations of the respective portfolio components. In this respect, the range of possibilities is quite wide.
One of the first types of securities that especially novice investors choose to purchase are government bonds. That is because investing in these instruments is associated with a relatively low risk. However, this does translate into a correspondingly lower potential profitability. As a general rule, income from bonds is subject to a flat-rate personal income tax of 19%. This rate is applicable to the difference between the purchase and redemption price, the interest earned on bonds purchased on the primary market, the discount, as well as the bonus in the case of premium bonds, but not all at once. The establishment of the tax base depends on the specific situation. It is also worth noting certain exceptional cases, tax exemption possibilities or discrepancies in accounting for bonds purchased on the primary and secondary markets.
Subsequent assets to invest in are shares and securities listed on the stock exchange. These, however, are more internally diversified and require a greater degree of market understanding and specialised knowledge. The tax return process is facilitated by the PIT-8C information issued by the brokerage office provided that the sale was made through it. The tax base is income understood as the difference between revenues and expenses. The former is the sale price of the shares at the time ownership is transferred to the buyer. The latter, on the other hand, is the catalogue of tax-deductible expenses, including, for example, those incurred in acquiring the shares. Remarkably, it is possible to offset a loss incurred against income derived from the same source of revenue either on a one-off basis or over the next five tax years, with certain restrictions.
Also highly regarded among investors are rental properties. They do involve a higher entry threshold, though with appropriate management they provide a regular passive income that requires less commitment on the investor’s part. Regularity also applies to the payment of tax on this income – by the 20th of the month following the accounting period. The registered rental revenue lump sum is based on a scale of 8.5 % of the revenue up to PLN 100 000 and 12.5 % of the revenue on the excess beyond this amount. Another issue that should be borne in mind, although it does not affect the profitability of the investment, is the real estate tax. However, it is not required to be assessed independently, since it is the local municipality that indicates its amount dependent on the square meterage in an administrative decree. A novelty in this respect could be the introduction of a cadastral tax, which would provide for the taxation of real estate on the basis of its value. As of now, the Ministry of Finance assures that it does not pursue such a solution. However, the idea of its introduction (on e.g. the third/fifth property owned) is present in the ongoing election campaign. Moreover, the latest OECD report for Poland includes recommendations for the implementation of such a solution.
As a relatively new instrument, cryptocurrencies still involve a high degree of unpredictability. They may result in either significant income or loss. Their fiscal classification can also raise concerns, as it is necessary to evaluate them carefully under several angles, including:
- income tax – regarding earned revenue, incurred deductible costs and income subject to taxation in accordance with the general rules,
- value added tax – with regard to the possibility to deduct VAT or apply an exemption,
- tax on civil law transactions – with regard to possible application of the tax on the sale of a property right or its exclusion from taxation.
What needs to be recognised is that classification in one of these taxes affects the remaining ones, which only further complicates the correct accounting for taxation on income from this source.
Whereas one of the older investment possibilities is gold (or other investment grade metals). The reason for this is that historically it has appreciated in value in times of economic crises, opposed to other assets. In terms of taxation, it is also unique as based on Article 122 of the VAT Act, its supply, intra-community acquisition and import are in principle directly exempt from this tax. Furthermore, it is not subject to the so-called Belka’s tax, as it is not listed in the catalogue of income from monetary capital. It is only subject to PIT in case it is sold within six months of the end of the month in which it was acquired. Interestingly, in certain forms, it also has a collector’s value.
On the subject of investment taxation, one cannot overlook the substantial dynamics of amending tax laws occurring independently of any economic changes. Despite promises of simplification, tax law is one of the most frequently amended branches of law. Regardless of the judgement of the amendments, the pace at which they are made forces taxpayers to be vigilant. Conversely, in some areas, the awaited legislative changes are postponed. This is the case, for example, with the Belka’s tax, which was originally only intended as a temporary solution. However, it has been functioning continuously in the Polish tax system ever since 2002. There are some interesting proposals for changes in this respect. For the time being, it is not to be abolished, but its restriction through the introduction of a tax-free amount is being considered.
Investment items are diverse both in terms of their response to the economic events and characteristics, but also in terms of the methods of taxation. While the former tends to work in the investor’s favour, the diversity of tax treatment of individual assets might prove challenging. In other words, diversifying an investment portfolio on the one hand reduces exposure to investment risk, but at the same time increases exposure to differing tax regulations. This is because not only are the rates or methods of calculating taxes different, but also the settlement periods and deadlines for fulfilling tax obligations, as well as even the return forms in which specific income must be reported. It is therefore important to obtain expert support not only in the area of finance or individual investment markets, but even more so in the area of tax settlements. Comprehensive financial and tax advisory services can provide the opportunity to benefit from lower investment risks without incurring the risk of not keeping up with the varied and ever-changing tax rules that apply to each investment. This ensures that settlement errors do not cancel out the profits earned and that investment objectives are pursued in a secure manner.
