Taxes on Investment Gains
- Investment gains are taxed under Capital Gains Tax in Ireland
- The rate of tax is 33% → €1 out of every €3 that you make
- The best way to avoid investment gains tax is to not sell
- The annual gains exemption can save you €419 in tax per year
- Investment losses can be used to reduce taxable investment gains
Reading time: 14 min
Written by:
Dan Malone
What Is Investment Gains Tax?
Investment gains tax applies whenever you sell an investment and make a gain.
In Ireland, this tax falls under the scope of Capital Gains Tax (CGT), which is charged on the gains made from the sale of the investment, not the total sales proceeds.
For example: You invest €5,000 in a company stock and 5 years later you sell it for €12,000. You’d have an investment gain of €7,000, which is what is liable to tax – not €12,000.
What is The Investment Gains Tax Rate in Ireland?
Irish investors pay 33% of their investment gains to Revenue. Comparatively, this rate is much higher than the rates charged in other countries. This means Irish investors are at a disadvantage when compared to investors in the UK and US.
| Country | Investment Gains Tax Rate |
|---|---|
| Ireland | 33% |
| United Kingdom | 18%-24% |
| United States | 0%-20% |
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How to Avoid Tax on Investment Gains in Ireland
It’s in an investor’s best interests to minimise how much tax they’re paying on their investment gains. Fortunately, there are ways to legally avoid Capital Gains Tax in Ireland.
Method 1: Don’t Sell Your Investments
One of the best ways to avoid tax is to not sell your investments. As a rule of thumb, so long as you continue to hold the investment, any gains are not taxable. The gain only becomes liable to tax when some or all of the investment is sold.
When you invest in company stocks using an investing platform, you’ll be able to monitor whether your stock investments are at a gain or a loss at any time.
- When the value of your investment increases, you’ll have an unrealised gain.
- When the value of your investment decreases, you’ll have an unrealised loss.
In the eyes of the tax law, unrealised gains and losses aren’t real. They haven’t yet come into existence as real gains or losses under your name and usually won’t be taxed.
When you sell an investment for a gain, what was previously an unrealised gain now becomes a realised gain, which is taxable. Similarly, when you sell an investment for a loss, this becomes a realised loss, which can be used to reduce your tax bill.
Key Insight: When you sell your stocks at a gain, you will have cash sitting in your brokerage account. There’s a common misconception that if you reinvest this cash or simply don’t transfer it back to your bank account, then you won’t have to pay investment taxes. This is not true. As soon as you sell the investment and realise a gain, a tax liability will arise. What you do with the cash proceeds from sale is irrelevant, you’ll have to pay the tax one way or another.
Of course, it’s not always as simple as never selling an investment.
- You could be sitting on a large unexpected gain that you want to access as soon as possible
- You might identify a better opportunity for your cash elsewhere
There are many reasons why selling could be the best option in a given scenario. Sure, you’ll have to sell eventually, but why not defer that tax liability for as long as possible and free up your cash today for more productive uses?
There are some circumstances under Irish tax law where CGT can apply to unrealised gains.
For example, if you own shares in a company and you choose to give those shares to your sibling, the tax law will deem you to have sold those shares at market value and a tax liability will be due. This applies even if no cash changes hands.
Method 2: Use Your Annual Gains Exemption
Irish tax law states that the first €1,270 of your net realised investment gains, in every tax year, is exempt from Capital Gains Tax. For example:
| Sales Proceeds | €12,000 |
| Original Investment | (€5,000) |
| Capital Gain | €7,000 |
| Annual Exemption | (€1,270) |
| Taxable Gain | €5,720 |
| Tax Payable (33%) | €1,890.90 |
The value of the tax saving here is €419.10, which is 33% of €1,270. This is the maximum benefit that you can get from the annual exemption in a given tax year.
The exemption is offered on a use it or lose it basis. Meaning if you have no realised investment gains in a given tax year, your annual exemption for that year is lost. It can’t be carried forward. Therefore, there is an incentive to have at least €1,270 worth of gains in every tax year, because those gains will be tax free.
A Bed & Breakfast transaction is a tax planning strategy that’s used to reduce taxes on investment gains in the future by increasing the cost of those investments each year. Here’s how it works:
The Facts: To keep things simple, let’s assume that we only have one company stock in our portfolio. Let’s say we invest €10,000 at the beginning of the year. We buy 1,000 shares at a share price of €10 per share.
Towards the end of the year, we notice that our stock has performed well and the value of our investment is sitting at €12,000. We now have an unrealised gain of €2,000. That means the share price is now €12 per share.
The Strategy: To make the most of our annual exemption, we would sell 635 shares. That’s what would give us a realised gain of exactly €1,270, i.e. the difference between 635 shares sold at €12 per share and 635 shares purchased at €10 per share. This is enough to fully use our annual exemption while having no tax bill.
The Benefit: We would then reinvest the total sales proceeds back into the stock immediately after selling it. In this case, the sales proceeds are €7,620, i.e. 635 shares at €12 per share. The benefit is that we’re now repurchasing the shares at a higher price of €12 per share.
The total value of our investment is exactly the same as it was before the sale, but the cost of the investment on paper is now higher. When we sell our shares in future, we’ll have a smaller taxable realised gain than if we hadn’t availed of the annual CGT exemption.
This can be done every year to increase the cost of your investments.
Reality Check: It’s worthwhile noting that the illustrative example above is an oversimplification in practice. It’s much more likely that you’ll be investing in company stocks throughout the year as opposed to one single point in time. The implication of this is that you’ll own shares in the same company at different prices.
When it comes to calculating your realised gain for a given year under Irish tax law, you must use the first in, first out (FIFO) method. Under FIFO, shares that you purchase first are deemed to be the shares that you sell first.
When paired with a bed and breakfast strategy, this means you must ensure that you’re selling the right amount of shares, based on what shares will be deemed to have been sold under Irish tax law. It’s easier to execute a bed and breakfast strategy from an administrative perspective if you invest via lump-sums as opposed to Euro-cost averaging. The less active the investing, the better.
Key Insight: It’s not a big deal if you don’t fully utilise your annual exemption. Even if you fully utilised your exemption every year for 40 years, your potential tax saving would be capped at €16,764. In the grand scheme of things, this isn’t a lot. When accounting for the time value of money, the real benefit is even less.
That said, if executing this strategy is an easy task for you, then go for it. Every little helps. But don’t obsess over it. It’s not going to be the difference between retiring early and retiring at the normal retirement age, especially when your portfolio starts to get into the six and seven figure ranges.
Method 3: Using Realised Losses
Realised investment losses can be set against realised investment gains. If you sell one investment and make a €5,000 gain, and you sell another investment and make a €5,000 loss, your net gain is actually zero. Revenue won't tax you on the €5,000 gain, because you haven’t actually made any money in reality.
If your losses in a given tax year exceed your realised gains, you can carry the excess loss forward to a future tax year to offset realised gains.
There are of course tax planning opportunities associated with realised investment losses. However, it’s important to understand the rules which limit your ability to avoid capital gains tax using realised losses, specifically for company stocks.
If you sell shares that are loss-making, you can’t repurchase those shares for a period of 4 weeks. If you do, the realised loss on the sale will not be available for offset against current or future realised gains on other investments. The only gains that could be reduced by those losses would be gains arising on the shares which were repurchased within the 4-week period.
Put simply, if you want the loss to be available against all of your gains, don’t repurchase the shares within 4 weeks of sale. If you repurchase some, but not all of the shares within 4 weeks, only part of the loss will be restricted.
If you’re planning on selling a loss-making investment, you shouldn’t buy any more shares in that company in the 4 weeks prior to the sale. Under Irish tax law, if there’s a purchase of company shares and, within a period of 4 weeks, there’s a sale of the same company shares, any gain or loss is to be first calculated on a last in, first out (LIFO) basis. Where there’s excess stock sold, only then will FIFO be used. This is best explained using a very simple example.
The Facts: Let’s say at the beginning of the year you buy 10 shares in a company. Towards the end of the year, you note that your investment is loss making. But you still like the company at its current share price, so you buy 10 more shares. Two weeks later, you sell 10 shares in the company.
Normally, the FIFO basis of calculating gains and losses would apply and your unrealised loss on the first lot of 10 shares would become a realised loss. However, because the sale happened within 4 weeks of the last purchase, the Irish tax law applies LIFO for calculating gains and losses.
LIFO At Work: Your most recent purchase of 10 shares is deemed to have been disposed of, not the first lot of 10 shares. This can result in you realising a smaller loss or even a gain on disposal, depending on how the share price has moved in the two weeks since you bought the shares.
If you had sold 12 shares, LIFO would apply to the first 10 shares and FIFO would apply to the remaining 2 shares. Likewise, if we only purchased 5 shares within the 4 weeks prior to selling 10 shares, LIFO would apply to 5 shares and FIFO would apply to 5 shares.
If you have a loss-making investment that you want to sell, you should make sure that you don’t buy any more shares in the 4 weeks prior to sale. Once you sell, you then have options:
Option 1: if you have realised gains on other investments, you can use your loss against these gains. Any excess losses can be carried forward.
Option 2: if you don’t have realised gains on other investments, you could make some. Similar to the bed and breakfast strategy, you would sell shares in another profitable investment, realise the gain, use your losses and the annual CGT exemption to reduce your taxable gains to nil and then repurchase the shares at a higher base cost. Therefore, in the future, you’ll have a smaller taxable realised gain.
Key Insight: It’s important to note that realised losses are used against realised gains before the annual CGT exemption in a given tax year. This is an important consideration if you’re trying to use the bed and breakfast strategy alongside a loss utilisation strategy.
Option 3: carry the full loss forward.
You’ve realised capital gains from sales of other investments. However, while you do have loss-making shares, these are shares that you want to hold long-term. In other words, if you sell them, you’d want to buy them back. In order to successfully extract your losses for use against your gains you must do the following:
- 1
Ensure that you don’t buy any more shares in the loss-making investment in the 4 weeks prior to sale; and
- 2Ensure that you wait 4 weeks after the sale before repurchasing shares in the loss-making investment.
The risk here is that the share price of the loss-making investment could increase significantly in the 4 weeks after the sale and you’d miss out on the gains. Equally though, the share price of the loss-making investment could decrease significantly during this period which would be good news for you.
If you’re setting up a Euro-cost averaging strategy into company stocks, you could set up in such a way that the time between investments is at least 4 weeks, or even 5 weeks to give yourself a one week buffer. That way, you’ll never have to worry about the loss restrictions. The other option is to simply pause your investments as needed.
Key Insight: The existence of loss restriction rules is yet another reason why day trading in the stock market isn’t a good idea. Because you’re entering and exiting trades over short periods of time, usually less than 4 weeks, any realised losses could very well be restricted.
Given the nature of day trading and the high failure rate, you’ll most definitely be incurring losses. But you might not be able to utilise those losses against gains.
Frequently Asked Questions
No, CGT doesn’t apply to ETFs. Instead, a separate funds tax of 38% applies to gains made on the sale of ETFs. In addition, unrealised gains on ETFs are taxed every 8 years.
No, the annual CGT exemption does not apply to ETF gains. ETFs aren’t taxed under the CGT regime.
No, realised losses on stocks, and other investments which are liable to CGT, can’t be used to reduce the value of realised gains on ETFs.
No, the annual exemption can’t be transferred between spouses or civil partners.
Yes, for spouses or civil partners who are jointly assessed for CGT, losses are automatically set against chargeable gains. It’s possible to make an application to not have losses be automatically transferred. This must be made on or before April 1st in the following year.
No, the only circumstance where this is allowed is where there are losses in the year of death that can’t be set off against other gains. In that case, losses can be deducted from gains of the deceased for the previous three years.
For gains made between January 1st and November 30th, you must pay tax by December 15th. Tax on gains made between December 1st and December 31st must be paid before January 31st in the following year. Late payments are subject to interest.
You must file your capital gains tax return on or before October 31st of the year following the date of sale. Late returns are subject to a penalty.
You must register for capital gains tax and make a payment online using MyAccount or Revenue Online Service (ROS).
MyAccount users will sign in, click on ‘Tax Registrations’ and select ‘Register’ beside CGT. For ROS users, click ‘Manage Tax Registrations’ and select CGT.
There are several different ways to file a CGT return. Self-employed individuals and those registered for income tax on ROS can use the digital Form 11 to file their investment gains. MyAccount users will need to download, fill out and upload a Form CG1 to Revenue via MyEnquiries.
Yes, if you sell investments you’ll always need to file a return regardless of whether or not you have a tax liability.
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