Limitation of income tax exemption from sales of securities and shares from 1 January 2025
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Limitation of income tax exemption from sales
As part of the consolidation package approved at the end of 2023, an amendment to the Income Tax Act was adopted, which introduced significant changes to the taxation of personal income from sales of securities and shares in the business corporations, effective from 1 January 2025. While the existing time test conditions remain unchanged, a new limit for tax exemption of such income was introduced at CZK 40 million per taxpayer per tax period.
New rules for income exemption
From the beginning of 2025, income from sales of securities and shares in a corporations that meet the time test conditions (three years for securities or five years for shares) is exempt from income tax only up to a total amount of CZK 40 million. Income exceeding this limit will be subject to taxation, with taxpayers able to claim expenses proportional to their taxable income. For illustration, let us consider a simple example:
A taxpayer of the personal income tax receives income of CZK 15 million from the sale of securities and CZK 35 million from the sale of shares in a corporation, both exempt based on the time test. The total income amounts to CZK 50 million. We assume that both securities and shares qualify for exemption based on the time test. The acquisition cost of the shares was CZK 20 million, and the purchase price of the securities was CZK 10 million.
The ratio of exempt income is 4/5 (CZK 40 million/CZK 50 million) and the ratio of taxable income is 1/5. Tax-deductible expenses are calculated in the same proportion as taxable income.
Securities (in CZK million) | Shares in corporation (in CZK million) | Total (in CZK million) | |
Income meeting the time test | 15 | 35 | 50 |
Acquisition/purchase price | 10 | 20 | 30 |
Exempt income | 12 | 28 | 40 |
Taxable income | 3 (1/5*15) | 7 (1/5*35) | 10 |
Tax – deductible expenses | 2 (1/5*10) | 4 (1/5*20) | 6 |
Partial tax base | 1 | 3 | 4 |
Securities and shares acquired by the end of 2024
For securities and shares acquired by the end of 2024, the law introduces special provisions for determining the acquisition cost. For sales after 1 January 2025, taxpayers can claim the market value of the security or share as of 31 December 2024, as an expense. For sales executed before the end of 2024 with payment after 1 January 2025 (e.g., installment payments), the market value as of the date of sale can be used as an expense.
Practical implications and recommendations
For claiming the market value as of 31 December 2024, or as of the date of sale, if it occurred before 31 December 2024, as a tax-deductible expense, we recommend obtaining an expert valuation report, particularly for holders of non-publicly traded securities or shares whose value might exceed the CZK 40 million limit or whose acquisition cost is significantly lower than current value. It is important to consider that obtaining relevant documentation and historical data for valuation may become more challenging with increasing time distance. Timely asset valuation can therefore provide taxpayers with a better understanding of potential tax implications for future sales of these assets.
For completeness, we remind that individuals remain obligated to submit a Notification of Exempt Income to the tax authority if such income exceeds CZK 5 million, within the same deadline as for the submitting their tax return.
The new limit for exemption of income from sales of securities and shares will also apply to income from sales of crypto assets. This topic is discussed in more detail in our next article.
If you have any questions regarding the above, please do not hesitate to contact our experts.
Authors:
Gabriela Ivanco, Tax Department Manager
Anna Klímová, Newsletter Editor
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