When you have investment income, your earnings are likely to be taxed. Here, you’ll learn about the different types of investment income, how they’re taxed, and more.
9 min read
These statements are intended to provide general information and do not constitute investment advice or any other advice on financial services and financial instruments such as stocks and ETFs. These statements also do not constitute an offer to conclude a contract for the purchase or sale of stocks and ETFs. Stocks and ETFs can be subject to high fluctuations in value. A decline in value or a complete loss of the money invested are possible at any time.
The values depicted are fictional and for illustrative purposes.Investing your money can help you build wealth and security, over both the short and long term. It can also have huge tax implications that you need to be aware of. Whether you’re just getting started with investing or have been at it for a while, it’s important to be aware of how you’ll be taxed on your investments. Generally speaking, any money earned as interest, dividends, or capital gains on sold investments is taxable, either at the source or when you file your taxes. However, how investment earnings are taxed can vary greatly depending on where you live, your filing status, and more. In this article, we’ll learn about taxes on investments, including how different types of investment income are typically taxed. We’ll also give you an overview of how investments are taxed in different European countries, and what to be aware of as an expat with investments in multiple countries.
Taxes and investing 101
Tax authorities generally levy taxes on any type of income, whether you’re working a job, collecting pension payments or rental income, or investing in equities. When investing in financial products, such as stocks, bonds, crypto, or savings accounts, there’s one rule of thumb: You’ll be taxed on any income you earn on your initial deposit. What does this mean? Well, let’s say you buy one share of stock for €100. After about one year, that stock you purchased is worth €150. If you decide to sell that stock, the extra €50 you’ve earned in profit will be taxed as capital gains. The same goes for interest earned on savings products. If you invest €500 in a high-yield savings account and earn €20 in interest over the course of the year, you’ll be taxed on that €20 in income. It’s worth noting that different types of investment income may be treated differently depending on the products you’ve invested in and how long your investment has been growing. Other factors, like your marital status or what you plan to use the money for, may also affect the tax treatment. Generally, taxes will only be due when you cash out your earnings, either via a sale of stocks, dividend income, or when interest income is deposited into your account. To understand how this works, let’s look at the different types of taxes that might apply.
Taxes on capital gains
Capital gains taxes apply when you sell an investment for a profit. The money you earn on your initial investment — whether that was a stock, a property, or a business — is called your capital gains. Let’s say you invested €10,000 in ETFs in 2014 and didn’t touch the money for 10 years. If €10,000 grew to €32,000 and you then sold the stock, you’d be taxed on the €22,000 you earned in profit. The inverse of this, capital losses, occur when you lose money on your investment. In certain cases, you can use all or a portion of these capital losses to offset your tax bill. In some countries, capital gains are charged at a flat rate, regardless of your earnings or how long you’ve had the money invested. Others tax capital gains at variable rates based on your tax filing status, tax bracket, and more. Some countries also differentiate between short- and long-term capital gains, with the former being charged at a higher rate than the latter. There are even certain jurisdictions, such as Bahrain, Belize, and the Cayman Islands, where no capital gains tax is imposed at all. Your capital gains tax rate depends on many factors, including your country of residence, your filing status, and your income during the year you withdraw the money. If you do owe capital gains tax, there are still some ways to help lower your tax bill. Investing in certain types of retirement products offered by your country of residence may lock you in at a lower tax rate, or help you save taxes during the year you invest the money. Or, you can use the losses accrued by your investments to offset the gains — a process known as tax-loss harvesting.
Taxes on dividends
When you own a share of stock in a company, you effectively own a small portion of the company. Some — though not all — of these companies return a percentage of their profits to shareholders in regular cash distributions called dividends. When dividends are paid out, they’re typically considered taxable income, whether you reinvest them into the company or not. Dividends are generally taxed in the year you receive them. This is the case whether your dividends are reinvested in company stock, remain in your brokerage account, or are transferred to your bank account. The amount of dividend income you’ll have likely varies depending on the amount and type of investments. Here, again, the tax rate you’ll owe on your dividend income will depend on the tax regulations in the country where you live.
Taxes on interest income
Earning interest is another type of taxable event. Unlike equities, which rise and fall in value, interest income is earned when you lend money to a bank or institution at an agreed-upon interest rate. You can earn interest with all kinds of products, from savings accounts to passbooks or overnight money accounts. The longer you have your money deposited, the more interest you’ll typically earn. Interest income is taxed based on when the money arrives in your bank account. This may happen monthly, quarterly, or on a yearly basis. In some countries, interest income is subject to withholding tax, meaning the bank will withhold your owed taxes and pay you the rest out in cash. In other cases, you’ll need to report your dividend income on your annual tax return and pay taxes on it.
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There aren’t many places in Europe where you can avoid taxes on your investments, though the tax rates vary substantially. Capital gains taxes average out to roughly 18.6% across Europe, but there’s plenty of variety between countries. Denmark, for example, charges a whopping 42% flat rate on capital gains, while Romania charges just 10%. To give you a sense of how the countries differ, let’s take a look at how investments are taxed in France, Germany, Spain, and Italy.
Taxes on investments in France
French residents are taxed a flat rate of 30% on all investment income, from dividends to interest or other capital gains. This consists of a 12.8% income tax rate and a 17.2% contribution to social security. However, several exceptions apply.Some households can opt for a sliding scale income tax, if they plan to hold their assets for an extended period of time. The allowance (as of 2024) is 50% for a holding period of two to eight years, and 60% for a holding period of over eight years. French citizens residing outside of France pay withholding tax on capital gains, and the rate fluctuates based on the taxpayer’s earnings. Capital gains earned from selling securities are taxed at the taxpayer’s income tax rate, rather than the flat rate. Furthermore, certain capital gains are exempt — for example, if they’re earned as part of an employee savings plan.
Taxes on investments in Germany
In Germany, most investment income is subject to withholding tax. This means that your taxes, whether from capital gains or interest income, are collected at the source. The rate as of 2024 is 25%, regardless of the period in which the money was invested. However, there is a tax allowance for your withholding tax depending on your filing status. For single filers, your allowance is €1,000. For married couples, this rises to €2,000. Note that you’ll need to file a tax exemption order to instruct your bank not to withhold the funds. Any money earned beyond this allowance will generally be taxed at the normal rate. But, just like in most countries, some exceptions apply. For example, if you bought your investments before the new capital gains law kicked in in 2009, you can sell your investments tax-free.
Taxes on investments in Italy
As of 2018, most investment income in Italy, including interest and dividends, is taxed at a rate of 26%. Interest income, however, may be taxed differently based on the source. For example, interest earned from government bonds is taxed at 12.5%, while other interest income is taxed at the usual 26% rate. Capital gains are categorized as “miscellaneous income.” Here, the tax rate is calculated based on the difference between the purchase and sale cost, minus any fees. Italian non-residents also need to pay a 26% tax on their investment income, although they may be able to reduce their tax rate by claiming certain credits.
Taxes on investments in Spain
In Spain, things get a bit more complex. Capital gains, interest, and dividends are taxed on a scale based on how much you’ve earned — regardless of the holding period. For the first €6,000, you’ll be taxed at a rate of 19%. From €6,000.01 to €50,000, you’ll owe 21%, and 23% on earnings between €50,000.01 to €200,000. From amounts over €200,000.01 you’ll owe 26% in capital gains taxes.Any losses you incur with your investments can be offset for the following four years. For Spanish tax residents only, capital losses incurred on sales of assets may be offset against capital gains. Any excess losses may be carried forward for four years.For Spanish non-residents, interest income is taxed at a flat rate of 19%.
The bottom line on investment income
In almost all cases, you’ll owe taxes on your investment income. To avoid any unpleasant surprises, it’s important to plan for this. When your investments go up, or when you earn interest on your funds, it’s tempting to think that all that money is going directly to you. But if you always consider taxes in your calculation, you’ll be better prepared when tax season rolls around. Make sure to read up on taxes in your country, and get support from a qualified tax advisor if you need it.
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