How to get an investment tax deduction

2023 Author: Malcolm Clapton | [email protected]. Last modified: 2023-07-28 10:38

Sometimes the state allows you to receive income from shares and not pay taxes. You just need to calculate and arrange everything correctly.

What is investment tax deduction

Investment tax deduction is the amount with which some investors - residents of the Russian Federation (those who spend more than 183 days a year in the country) are allowed not to pay personal income tax (PIT). And if the money has already been paid to the budget, then return it.

Most of the income of Russians is subject to personal income tax at 13%. But the state has a set of tax deductions to reward citizens: it is ready to return the money if you do something that it approves. For example, you buy real estate, study, give birth to children. The investment tax deduction is intended to stimulate citizens not to keep money in a closet, but to invest in the economy.

If you apply for a tax deduction for a certain amount, you can return 13% of this amount.

What are investment tax deductions and when can they be used

For those who invest, the law provides for three types of deductions.

On income from the sale of securities

Tax on income from the sale or redemption of securities may not be paid at all if several conditions are met:

• you have owned them for more than three years;
• you bought them after January 1, 2014;
• the securities were not recorded in the individual investment account.

The tax deduction on income from the sale of securities applies to shares and bonds admitted to trading on Russian stock exchanges, or investment units of open-ended mutual funds managed by Russian companies.

Income in this case is the difference between the amount you sold the shares for and the cost of purchasing them. Moreover, expenses mean not only spending on the securities themselves, but also, for example, the exchange fee. However, the amount of the deduction cannot exceed the number calculated by the formula:

Deduction = 3 million × K_{central bank}

Coefficient K_{central bank}depends on whether you owned the sold securities for an equal amount of time or not.

If the securities were purchased in one year and sold in the same year, K_{central bank}equals the number of full years you have owned them all. Say, if you bought bonds in 2015 and repaid them in 2020, then K_{central bank}equals four, since the full years of ownership are from 2016 to 2019. Therefore, the maximum deduction would be:

Deduction = 3 million × 4 = 12 million

If you earned less on shares, you don't have to pay tax.

If you purchased stocks or bonds in different years, K_{central bank} is calculated using a complex formula that looks like this:

V_i is the income from the sale of securities, i is the holding period in full years. When determining income, only stocks and bonds that you sold for more than you bought are taken into account. n is the number of terms of holding securities in full years. If the tenure of two or more securities is the same, then n = 1.

An example will make it a little clearer. Let's say you sold two blocks of shares in 2020. You owned the first one for three full years and earned 300 thousand on the sale. For the second, these parameters are 5 years and 500 thousand. Let's count:

TO_{central bank} = 300 thousand × 3 years + 500 thousand × 5 years / 300 thousand + 500 thousand = 4.25

Accordingly, the maximum deduction will be as follows:

Deduction = 3 million × 4.25 = 12.75 million

However, if your income from the sale of securities is far from millions, you don't have to bother with complicated calculations. You will definitely not make it to the maximum and you can qualify for an investment tax deduction for the entire amount of your earnings.

On income from IIS

Individual investment account (IIS) is a variant of a brokerage account with special conditions. It was introduced to motivate citizens to invest more actively and get a little more from investments thanks to bonuses. Tax deduction is one of them.

It is provided for income on the IIA when it is closed, if the account has existed for at least three years. Another condition is not to use any other tax deduction available to IIS owners. You can choose only one of them.

There is no upper bar for this investment tax deduction; personal income tax may not be paid on all income received on an individual investment account.

For the amount deposited on the IIS

This is the second deduction option for IIS. It is provided in the amount of the amount deposited on the IIS, but not more than 400 thousand rubles a year, that is, you can return up to 52 thousand rubles. You put less on the IIS - the deduction is less (13% of the amount deposited into the account). Deposit more - you still get a deduction of 52 thousand rubles.

Unlike the deduction for income under the IIA, which can be claimed upon closing the account, the deduction for the deposited amount can be used every year. But the IIS itself must still exist for at least three years.

Important: the previous two deductions were directly related to income from transactions with securities. A deduction for the amount deposited on the IIS allows you not to pay or return the personal income tax paid on basic income. For example, if you work officially and the employer pays taxes for you, then you can return the transferred money.

What documents are needed to get an investment tax deduction

You will need a 2 ‑ NDFL certificate of income and withholding taxes for the year. You can take it from your employer or find it in your personal account on the tax office's website, where it will appear after March 1. Further, depending on the deduction, the list of documents will vary.

On income from the sale of securities

You will need broker reports to confirm:

• the term of the securities in the account;
• the correctness of the calculation of the tax deduction (if you receive a refund through the tax one);
• that the sold securities were not taken into account in the IIA.

The broker definitely understands what he is dealing with, so just contact him. And you will be given the necessary documents.

On income from IIS

In addition to a 2 ‑ NDFL certificate of income and taxes, you will need:

• A document that confirms the right to a deduction: an IIS maintenance agreement, or brokerage services, or something similar.
• Broker reports on transactions on IIS.

For the amount deposited on the IIS

To issue an investment tax deduction, in this case, you will need:

• A document that confirms the right to deduction, for example, an IIS maintenance agreement or brokerage service.
• Papers proving the fact that funds were credited, for example, a payment order or a receipt and cash order.
• Help that before that you did not use the deduction for the amount deposited on the IIS. You will need it if you are applying for a deduction through a broker. You can get it at the tax office.

How to get an investment tax deduction through a broker

This option is available if you want to get a deduction for profits from the sale of securities or income from IIS. The broker simply won't withhold tax.

This is the easiest way and requires minimal participation from you. You need to contact a broker and submit an application form. If you are claiming a deduction for income from IIS, you must also confirm with a certificate that you have not previously used another deduction from the tax.

How to get an investment tax deduction through the tax

With this method of obtaining a tax deduction, you return the previously paid tax. This option can be used to register all types of investment deductions. But you have to do it a little differently. There are two ways.

Through your personal account on the tax website

This option is suitable for registration of a deduction for the amount deposited on the IIS. Lifehacker has detailed instructions on how to do this.

Through the special program "Declaration"

To register deductions for income from sold shares or income from IIS, you will need a special program "Declaration". You can download it on the tax website.

Next, you need to fill out a declaration. Here are a few steps to take.

Set conditions

• Select your inspection number and OKTMO from the drop-down list. You can find out all this at the Federal Tax Service.
• Enter the revision number. If this is your first time filing, leave zero. Each next time you send the revised document to the tax office, you will need to add one.
• Choose your status.
• Immediately put a tick in the line "Create a tax refund application", because for this, everything is being started.

Enter information about the declarant

At this stage, you need to enter personal data. Everything is intuitive here.

Enter data on income received in the Russian Federation

• Income code. For most cases, code 13, marked in yellow, will do. It includes salaries, royalties, and other standard income. If this code does not suit you, hover the cursor over each of the colored numbers - an explanation will pop up, which type of profit is meant, and you can select the appropriate option.

• Income information. To add it, you first need to click on the top "+" sign, and then on the bottom. All information is in the 2 ‑ NDFL certificates that you received from your employer or on the tax website. At this stage, among other things, it is necessary to declare income received from operations with securities.

First, the source of payments is filled in, then information about income

Information about the organization is in the 2-NDFL certificate. If the income is received from an individual, his full name is indicated.

Select income code from the drop-down list

There are quite a few options, but they are understandable

Indicate income received from the sale of securities

Choose a suitable option from the list

• Deductions received through a withholding agent. If you are already provided with standard, social or other tax deductions through your employer, that is, you do not pay tax for a certain amount, then this should be noted at this stage. Information on deductions is presented in the 2 ‑ NDFL certificate. If you don't have them, skip this point. (And learn more about deductions - suddenly you're missing out on getting them.)

Fill in the deduction details

Moving on to the important thing. On the "Deductions" tab, select "Investment and Securities Losses". Let's figure out which is which:

• The amount of the deduction provided for in subparagraph 1 of paragraph 1 of Article 219.1 of the Tax Code of the Russian Federation is a deduction for income from securities. If you are interested in it, enter in the top box the amount of your profit from the sale of stocks, bonds or shares, which you intend to exempt from taxes.
• The deduction provided for in subparagraph 3 of paragraph 1 of Article 219.1 of the Tax Code of the Russian Federation is a deduction for income from IIS. Check the box if you need it.

Save or print your declaration

After you have entered the details, use the "Check" button to make sure that you have completed everything. If you plan to submit a document to the tax office in person, send it to print. Or save it as an.xml file.

Submit your declaration

In the form of an xml-file, the declaration can be uploaded to the website of the tax authority in your personal account. To do this, you need to go through the following path: home → “Life situations” → “Submit a 3 ‑ personal income tax” → “Download”.

If it is convenient for you, you can also take the printed documents to the tax office in person or send them by mail.

How quickly the money will come

If you are applying for a tax refund and you filled out everything correctly the first time, then get ready to wait up to four months. The tax office has a month to check the declaration, but the department can conduct a desk audit, which will lengthen the process to three months.

If the tax office has any questions, depending on the request of the inspector, you will need to provide additional documents or submit an adjusted declaration, which, of course, will also affect the waiting time.

After the inspector approves the deduction, another month is given to pay the money.