Tax on Capital Gains – the Exchange Rate Impact.
Under Italian tax rules capital gains are, as a general rule, and in line with procedures in most modern OECD member states, taxed as the difference between the original base cost and the sale proceeds. Tax is, on the whole, only due at the moment where the gain is realised.
This article does not deal with the different rules applying to an individual who is carrying on a trade or business of dealing or investing in financial assets. or who have invested via an Italian financial intermediary (bank, broker or asset manager, and opted for the “regime amministrato” – the regime whereby investments are managed by an Italian financial intermediary.
Where there is an Italian intermediary, the intermediary will, unless an alternative election is made, be liable for calculating the gains, reporting overseas assets, and accounting for the appropriate tax. For people who invest directly via an online platform not managed by Italian financial intermediary or directly in non Italian financial assets , gains (and losses) must be reported ,generally in section RT of the Italian tax return.
Where investments are made in non Euro assets, the Italian rules provide that the capital gain or loss is the difference between the purchase price converted into Euro at the date of purchase, and the value in Euro of the sale proceeds at the date of sale. Simply converting a gain in foreign currency into Euro using the FX rate applicable at the sale is not the correct approach, since it fails to capture the exchange rate difference.
To do the calculation properly it is necessary to know the date on which the asset was purchased, as well as on the date it was sold.
Example 1 – a 2020 Purchase
If, for example shares in a UK company were purchased in December 2020 and disposed of by an Italian tax resident in June 2024 we have the following result.
| Transaction | Transaction Date | Amount in FX | Foreign Currency | FX Rate £1 = Euro | Base Cost in Euro |
| Purchase | 31/12/2020 | £119,300 | GBP | 1.103 | € 131,642.83 |
| Sale | 30/06/2024 | £154,000 | GBP | 1.181 | € 181,940.62 |
| Gain | £34,700 | € 50,297.79 |
As can be seen doing the calculaion the proper way, gives an extra approx Euro 10k of gain compared to simply converting the sterling gain at the sale date exchange rate. £34,700 converted into Euro at the FX rate for the date of sale would give a gain of Euro 40,946.
The incorrect approach effectively means applying the same sale date FX rate to the base cost. That would give a Euro base cost of Euro 140,944.91, instead of the Euro 131,642.83 shown in the calculation above.
Doing it the right way, using the December 2020 FX rate, as required by Italian tax rules gives a lower base cost (and hence larger gain) by virtue of the fact that Sterling was worth only Euro 1.10 at the example purchase date as opposed to the Euro 1.18 applicable for the month of June 2024.
Example 2 – A 2015 Purchase
On the other hand, if we take December 2015 (when sterling was soaring and producing nearly Euro 1.19) for the example and applying that rate to the base cost, we get the opposite effect.
| Transaction | Transaction Date | Amount in FX | Foreign Currency | FX Rate £1 = Euro | Base Cost in Euro |
| Purchase | 31/12/2015 | £119,300 | GBP | 1.378 | € 164,335.93 |
| Sale | 30/06/2024 | £154,000 | GBP | 1.181 | € 181,940.62 |
| Gain | £34,700 | € 17,604.69 |
In the second example, the taxable gain is “only” Euro 17,605.
If the exchange rate applicable to the purchase is higher that the rate at date of sale, there is an FX “loss” to be included in the computation of the gain. If the purchase FX rate is lower, then there is a taxable FX gain to be added onto the actual gain in original currency.
FX Rates to be used
To do the calculation properly it is necessary to use the Bank of Italy exchange rate portal, taking the spot rates for the date of the date of date sale.
https://tassidicambio.bancaditalia.it/terzevalute-wf-ui-web/dailyRates
Tax Agency guidelines refer very clearly to the FX rates to be used, So using non approved rates does risk adjustment for any extra tax as a result of failure to use the correct rates. The Italian Tax Authorities are also are entitled to enquire to ensure that whatever non-standard rates you do choose, that you them in a consistent and fair manner. Manipulating rates to get a tax advantage, could lead to increased penalties.
Valuation Methodology: Identifying the Cost of Assets Sold
In calculating any gain the taxpayer must be in a position to demonstrate by reference to contemporaneous documentary evidence (broker’s asset managers statements, contract notes, bank statements etc.), the price that was paid for the investment being disposed of.
Where the same investment has been acquired on several occasions at different prices, and(or where investments have been sold in tranches over the years, calculating a disposal gain requires a method for identifying the acquisition cost attributable to the investment sold.
Common methods include LIFO (last in, first out), which treats the most recently acquired units as sold first; FIFO (first in, first out), which uses the oldest acquisitions first; and weighted-average cost, which averages the cost of the relevant holdings. These methods can produce materially different gains for a particular year.
Italian tax rules provide that the LIFO (last in first out) method must be used in calculating gains on most types of asset. That means taking as the base cost, the price of the most recent purchase, or purchases. This is usually (but it depends on the actual numbers) more favorable to the taxpayer facing a gain on a disposal, and less favorable where there is a loss, where market values are rising. In this case the LIFO method usually operates to defer the gain or loss.
A further problem is that many brokers and asset managers jurisdictions outsdie Italy use (and perhaps are required to use under the tax rules of the country in which they are based), a weighted- average cost basis. This means that all purchases over the years are pooled to produce an average base cost, which is then applied to the numbers of units of an asset sold, to produce the applicable base cost. The capital gain shown in the foreign brokers or asset managers annual statement is therefore the difference betweens sale proceeds and that average cost. Since it is impossible to apply an FX rate to average cost, it is impossible to comply with Italian tax rules for the calculation of the gain.
In order to calcate capital gains realised by an Italian resident taxpayer correctly, it is necessary to take a report issued by the foreign broker/asset manager showing all sales and purchase of the individual asset disposed of and reconstruct, salòes and purchases on a LIFO basis to arrive at the Euro base cost . We need to calculate gains on a LIFO basis which means logging each and every transaction,
As a tax resident of Italy Holding assets in non-euro currency is complicated, and risky.
For this reason we often advise that clients moving to Italy consider investment in products manged by an Italian intermediary and consider a “wrapper” type product (such as a with-profits insurance policy. By doing so the policy holder passes responsibility to the insurance company to track the sales and purchases. Even if there are sterling denominated (or exposed) assets in the portfolio, they are translated into Euro by the insurance company, so that you can see the Euro position (ie. the potential gain or loss on an asset in Euros) at any time.
If you are holding non Euro assets as a tax resident of Italy, you are never sure of the Euro gain or loss until you have set up the purchase and sale history in Euros – a sterling or dollar gain might even give a Euro loss, and vice versa. You also need to consider the general point as to whether it wise to maintain any exposure to exchange rate movements once you are living in Euroland.
Foreign Asset Reporting and IVAFE (wealth tax)
Another consideration is the foreign reporting rules and wealth tax rules.
Pro Rata
Let’s say you had an asset with a value at 1 January 2024 of Euro 10.000. If you sell it today for, say, 11,000 the IVAFE tax will be 0.2%, calculated on 11,000 for the period of ownership in the year, say 188 days. So the calculation is 11,000 x 188 ÷ 365 x 0.2% = 11.33.
Whilst the Italian Tax Agency has stated [insert link] that it is possible to use the entire portfolio value as the basis for the calculation of IVAFe due in the year, taking this approach mans potentially paying more wealth tax, due to the fact that purchases and sales in the year are not being tracked for the purposes of apply the daily pro rata, resulting in a higher payment of tax.
A correct approach requires listing movements on the portfolio, individual investment by investment and calculating the wealth tax. This approach also also information required by the Foreign Asset Reporting Section of the Return to be correctly complied – identifying the relevant country for each individual investment and reporting of the corresponding income or gain section of the tax return showing income or gains, if any onte the relevant asset.
Correct reporting thus requires a detailed list of movements within a portfolio account.
Tracking
The Foreign Asset Reporting Section of the Return also serves as a “tally” of movements on a portfolio of i9nvestments held via a non Italian intermediary.
You would expect, on the example above, the capital gains section of the tax return to report the gain of 1,000 (subject to exchange rates – see below) In other words a difference of value, may (but this depends on market values) point to a disposal at a gain.
A sale during the year also begs the question as to where proceeds of sale get invested, as wealth tax would be due for the remainder of the year (except for any time that funds are kept on current or deposit account.
Broker’s Bank Accounts
Reporting the total value of an investment portfolio as a whole also means losing the potential advantage of the flat IVAFE rate applicable to current and deposit accounts (Euro 34.2 as opposed to the 0.2& or 0.4% rates). Brokers and Asset Managers will often maintain bank accounts to hold short term funds (e.g resulting from sales of assets pending re-investment). If these accounts can be identified separately from the individual investment it may be appropriate to treat there accounts a current or deposit accounts qualifying for the flat rate of IVAFE.