Effective Taxation of Stocks and ETFs

How to Effectively Navigate the Taxation of Stocks and ETFs? Your Profit and Income Are Two Different Things.

Under Czech legislation, income from investments is divided into two main categories according to the Income Tax Act (ZDP). The first is income from capital assets under Section 8 of the ZDP. This group primarily includes returns from holding assets, such as dividends from stocks, interest from bonds, or interest from funds in accounts not used for business purposes. This income is taxed separately, and no expenses can be claimed against it. The second group is other income under Section 10 of the ZDP. This group includes proceeds from transfers for consideration, i.e., from the sale of securities, shares, or cryptocurrencies.

It is absolutely crucial to distinguish between total income and profit. Income represents the total sale price for which you sold the security. Profit is the difference between this sale price and the acquisition costs (i.e., the purchase price plus transaction-related fees). Although tax is paid only on the profit earned, the criteria for the tax liability to arise are based on the total amount of income. 

In practice, this means that even if you sell stocks with a profit of only CZK 5,000, but the total sale price (income) exceeds CZK 100,000, you must file a tax return. A similar obligation arises even if the trade results in a loss, but the total income from sales in that year exceeds the set limit. In such a case, although you do not pay tax on zero profit, you cannot avoid the administrative duty of filing a tax return.

Basic Tools for Tax Optimisation: Two Key Tests That Can Save You Hundreds of Thousands.

Czech tax legislation offers two basic mechanisms through which income from the sale of securities can be exempt from income tax. An investor who has insight into these rules can significantly optimise their tax burden.

The first is the value test. This states that if the total of all your income from the sale of securities in one tax period (calendar year) does not exceed CZK 100,000, this income is tax-exempt. It is absolutely crucial that this is a cumulative amount for all sales across all platforms and brokers you use. It is not possible to apply the limit separately for each broker. This test applies to income, not profit, and also applies to loss-making trades if the limit is exceeded.

The second, and key for long-term investors, is the time test. If you hold a stock, ETF, or mutual fund unit for more than 3 years, the income from its sale is fully tax-exempt. This principle incentivises long-term investing and can lead to significant tax savings if the investor waits for this period to be met. Critically, the time test is assessed for each security separately. This can be confusing if you buy the same stock in parts.

In such a case, it is necessary to accurately record the holding period for each unit and use a clear methodology for each sale. The FIFO (First In, First Out) method is standardly used, where the units sold are matched with the oldest ones purchased. This means that the stocks you bought first are sold first. Although this method is the most common and easiest for tax authorities to understand, it is not always the most tax-efficient. Detailed knowledge of the legislation and proper record-keeping are therefore essential.

The lawyers at ARROWS deal with this issue every day and have extensive experience in setting up internal tax processes. Our lawyers are ready to help you with a detailed analysis – write to us at consultation@arws.cz.

A Change That Will Affect Many Investors: How Does the New CZK 40 Million Limit Work?

Effective from 1 January 2025, a significant amendment came into force affecting the tax exemption of income from the sale of securities and shares in business corporations. While the value test up to CZK 100,000 and the 3-year time test remain in place, the exemption for income from sales that otherwise meet the time test is now limited. Newly, this income is exempt only up to CZK 40 million per tax period (calendar year).

This amount is cumulative for all income that otherwise meets the time test, i.e., for both securities and shares. Any income exceeding this threshold is no longer tax-exempt and is subject to the standard rate of 15% or 23%, depending on the total amount of taxable income. In practice, this means that an investor who sells stocks held for more than 3 years for CZK 50 million will have to pay tax on CZK 10 million (the amount exceeding the limit).

Although this legislative change was introduced from the beginning of 2025, its fate is subject to unusual legal uncertainty. In September 2025, the Chamber of Deputies approved an amendment that repeals this CZK 40 million limit for stocks and shares effective from 1 January 2026, thus restoring the full exemption for income that meets the time test. However, the limit is expected to be maintained for income from the sale of crypto-assets. This legislative turbulence has a major impact on long-term investors planning larger sales. The legal environment is changing in real time, which places enormous demands on monitoring legislative developments and timing transactions correctly.

The lawyers at ARROWS monitor legislative changes in real time to ensure maximum certainty for their clients. For an immediate solution to your situation, write to us at consultation@arws.cz.

Foreign Investments and Dividends: How to Ensure Correct Taxation and What Is Double Taxation?

The taxation of investment income from abroad is inherently more complex, primarily due to different tax systems and applicable international treaties. This is where the biggest mistakes often occur, leading to incorrect tax assessments.

With dividends, the situation differs depending on whether they are paid by a Czech or a foreign company. Czech companies automatically deduct a 15% withholding tax on dividends directly at the source, so you do not need to report this income in your tax return. Conversely, the situation is different for foreign dividends, even if tax was withheld in the country of origin. This income must always be reported in your Czech tax return, at the gross amount, before any tax was withheld.

To minimise the tax burden, the Czech Republic has concluded double taxation treaties with other countries. These treaties allow for a tax credit for the tax you have already paid abroad against your Czech tax liability. However, this only applies up to the amount specified in the relevant treaty, and no more than the Czech tax rate (currently 15%). 

An investor who relies on their foreign broker withholding a 30% tax (for example, in the US, if they have not signed the W-8BEN form) risks having to claim the overpayment directly from the US tax authority, the IRS, which is administratively very demanding.

A specific situation arises with the taxation of ETF funds. Their tax treatment depends on the fund's tax domicile (often Ireland or Luxembourg) and its type – whether it is accumulating (Acc) or distributing (Dist). Distributing funds pay dividends into the investment account, which the investor must then tax in the Czech Republic, as Ireland does not withhold tax on dividends. 

In contrast, accumulating funds reinvest dividends within the fund, which means that the Czech investor does not have to deal with dividend taxation. A potential tax liability arises only upon the sale of the units, and the same rules apply as for stocks. Many investors are unaware of this difference, which can lead to the wrongful omission of taxable income.

Thanks to the ARROWS International network, built over ten years, the ARROWS law firm handles issues with an international element on a daily basis. Our team has expertise that transcends borders and is ready to help you with the necessary documentation and communication with foreign authorities. Connect with us at consultation@arws.cz and get a tailor-made legal solution.

Ignorance Is No Excuse: What Risks Do You Face and What Are the Penalties?

Errors in a tax return, whether intentional or not, can lead to unpleasant tax audits and high penalties, which can reach up to 15% of the undeclared income. A major risk lies in the fact that many investors rely on the tax documents provided by their foreign brokers. However, these reports are often not compliant with Czech legislation.

For example, a broker may only report profit and loss instead of income and expenses, making it impossible to correctly apply the value test. Similarly, reports often use the broker's internal exchange rates instead of the official rates of the Czech National Bank (ČNB) on the transaction date. 

Among the most serious errors is the failure to account for corporate actions such as splits, spin-offs, or mergers, which can incorrectly interrupt the time test and trigger a tax liability where one would not otherwise exist. An investor who relies on a faulty report risks filing an incomplete tax return, which can have serious financial consequences.

Professional Tax Optimisation: How to Save Money Legally?

Tax optimisation is a completely legal and legitimate process that uses options offered by law to reduce tax liability. It is not tax evasion, but smart and strategic planning, as repeatedly confirmed by the Supreme Administrative Court. Professional tax optimisation is based on a detailed knowledge of the law and on proper record-keeping of your investment transactions.

One of the most interesting and effective techniques is the matching of purchases and sales. While most investors intuitively use the FIFO (First In, First Out) method, i.e., matching a sale with the oldest purchase, the tax law allows for a choice. For example, you can use the LIFO (Last In, First Out) method, where you sell the most recent purchases, or the MaxLose method, which matches a sale with the purchase with the highest acquisition cost, thus maximising the tax-deductible loss. The right choice of method can significantly affect your partial tax base. 

The lawyers at ARROWS can help you prepare internal guidelines for tax processes that will prevent chaos and ensure correct and tax-advantageous matching of transactions.

Another proven strategy is loss realisation. Within the other income category, you can aggregate income and expenses from the sale of securities to reduce your overall tax base. This means that if you have a profit from one stock, you can offset it with a loss from another non-exempt position. However, it is necessary to remember that you cannot report an overall tax loss, and moreover, trades that are exempt based on the time test are not included in these offsets.

The lawyers and tax advisors at ARROWS deal with this issue daily. We design structures for clients that have a strong economic justification and can withstand in-depth audits focused on the abuse of law. We help clients not only with legal documentation but also with building the economic narrative of their transactions. In addition, we offer expert training for employees and management, including certification, to ensure your team is always informed about current rules and risks. Need legal help with tax optimisation? Contact us at consultation@arws.cz.

Don't Be Caught Off Guard by Taxation – Secure a Partner for the Strategic Management of Your Investments.

The taxation of stocks and ETFs is not just about filling out a single form. It's about strategy, risk prevention, and maximising your net profit. Don't wait for a mistake to happen or for the tax office to call you for a tax audit. The right choice of a tax and legal partner will help you turn this obligation into a strategic advantage.

With the lawyers at ARROWS, tax matters become a manageable and structured process. Our experience is evidenced by long-term cooperation with clients – our portfolio includes more than 150 joint-stock companies, 250 limited liability companies (s.r.o.), and 51 municipalities and regions. We pride ourselves on speed and high quality. In addition to standard legal services, we can connect clients with each other if they have interesting investment or business opportunities. And we are also happy to listen to interesting entrepreneurial or business ideas.