Investment income versus capital gains: the two families of financial income in Italy

In 2026 Chiara earns €1,000 of interest on her savings account and, in the same year, sells a block of shares at a €1,000 loss. She assumes the two cancel out and that she owes nothing. Her bank still withholds €260 from the interest. Nobody made a mistake: in Italy interest and share losses belong to separate families of income, and the tax system keeps them apart.

Two families of financial income

Italy's consolidated income tax code, known as the TUIR, sorts what savers earn into two broad groups. The first is investment income, or redditi di capitale: interest on a deposit account or a bond, dividends paid by a company, distributions from a fund.

The second group is miscellaneous financial income, or redditi diversi di natura finanziaria. It covers the gains you make when you sell a security for more than you paid for it, together with the net results of derivative contracts.

This is not a lawyer's distinction. The two groups are computed differently, reported in different places and, above all, never offset against each other. An investor who ignores the split learns, as Chiara did, that a heavy stock market loss does not trim a single euro from the tax on coupons received that year.

A handy test is to ask where the money comes from. If it arrives because you own something, such as money you have lent or a stake in a company, it is investment income. If it arises because you sold something at a price different from the one you paid, it is miscellaneous income.

Put simply, a bond coupon is the fruit of the tree, while the profit on selling the bond itself is a capital gain. Keep that image in mind: it predicts most of the rules that follow.

Interest and dividends: 26% on the gross amount

Article 3 of Decree-Law No. 66 of 24 April 2014 set a single rate for withholding and substitute taxes on interest, premiums and other proceeds under Article 44 of the TUIR, and on miscellaneous income under letters (c-bis) to (c-quinquies). That rate is 26 per cent.

The same provision extends the 26% rate to interest on bank and post office current and deposit accounts, and to bonds issued by banks and companies. For an ordinary saver, this covers almost every euro of interest that reaches a personal account.

Most of the time the saver computes nothing at all. The bank crediting the interest, or the intermediary collecting the dividend, keeps back the tax and pays it over to the State on the investor's behalf.

Italian law calls this a final withholding tax or a substitute tax. Either way, once the 26% has been taken, the income has completed its tax journey: it is not added to your other income in the annual IRPEF return and is not taxed again at progressive rates.

Dividends that an Italian limited company pays to a resident individual acting outside a business are governed by Article 27 of Presidential Decree No. 600 of 29 September 1973. The company applies a 26 per cent final withholding on profits paid in any form.

The rule applies to qualifying and non-qualifying shareholdings alike. Whether you own a handful of listed shares or a large stake in a family company, the dividend reaches you already taxed at the same rate.

Because the tax falls on the gross figure, one practical consequence is often missed. Account fees, stamp duty and custody charges on a securities account do not shrink the base on which the 26% on interest is calculated.

Suppose an account yields 300 euros of gross interest and costs 80 euros in fees. The tax is computed on the full 300 euros, not on the 220 euros you are actually better off by.

Government bonds: the reduced 48.08% base

The same Article 3 of Decree-Law 66/2014 keeps certain income out of the move to 26%: returns on Italian public debt and equivalent securities, on bonds issued by States on the list of countries that allow adequate exchange of tax information, and on bonds of their local authorities.

Parliament's intention was to keep a lighter levy on these instruments, which finance the public sector. The mechanics differ depending on whether we look at the interest or at the gain on a sale.

For capital gains, the chosen device is not a second rate but a smaller base. The decree rewrote Articles 5, 6 and 7 of Legislative Decree No. 461 of 21 November 1997: gains on these securities count for 48.08 per cent of the amount realised.

The ordinary 26% is then applied to that reduced figure, so the rate never changes but the slice of profit exposed to it does.

The percentage also works the other way round. Had Andrea sold the BTP at a loss, that loss would likewise have counted for 48.08% of its amount. The logic holds together: a euro won or lost on a public bond weighs less than a euro won or lost on a share.

Capital gains: which transactions and how to compute them

Article 67 of the TUIR lists precisely which transactions produce miscellaneous financial income. Each letter of its first paragraph covers a family of assets, and the letter matters because it decides how losses can later be used.

Letter (c) deals with qualifying shareholdings, while letter (c-bis) catches every other shareholding, meaning ordinary shares and stakes that stay below the qualifying thresholds.

Letter (c-ter) covers securities other than those representing goods, foreign currency, precious metals in raw or coin form, and units of collective investment undertakings. Letter (c-quater) deals with derivatives, and letter (c-quinquies) with selling or closing out arrangements that generate investment income.

A stake becomes qualifying when the securities sold represent more than 2 or 20 per cent of the voting rights at the ordinary general meeting, or more than 5 or 25 per cent of the capital. The lower thresholds apply to listed securities, the higher ones to all other holdings.

The test looks at every disposal made within a twelve-month window, even if the buyers are different people, so splitting a sale into smaller slices does not avoid the qualifying status.

The gain is computed under Article 68(6) of the TUIR. Start from the price received and subtract the purchase cost or value, increased by every related charge, including any inheritance or gift tax paid. Interest expense is excluded: if you bought on borrowed money, the cost of the loan does not come off.

When the same security was bought in several tranches at different prices, you need to know which lot counts as sold. For investors who report themselves, Article 67(1-bis) of the TUIR says the most recently acquired holdings are deemed sold first.

The second module shows that an intermediary running the administered regime follows a different rule, using the weighted average cost of each homogeneous category of securities.

For units in mutual funds and similar vehicles, the law splits the return in two. Article 3(12) of Decree-Law 66/2014 names both the proceeds under Article 44(1)(g) of the TUIR, which are investment income, and the letter (c-ter) miscellaneous income arising from holding such units.

Before counting on a fund redemption to absorb an old loss, it is therefore worth asking your intermediary how the result was classified on the statement.

Capital losses: what can be offset against what

The heart of the system is Article 68(5) of the TUIR. Gains under letters (c), (c-bis) and (c-ter) are added algebraically to the matching losses, to the gains and losses on derivatives and to the proceeds under letter (c-quinquies).

If losses exceed gains in a given year, the surplus can be deducted from gains and other miscellaneous income of the following tax years, but no later than the fourth one.

One condition is decisive and frequently overlooked. The carry-forward is only available if the loss is reported in the tax return for the year in which it was realised.

Someone who lost money on the market in a year when they filed no full return, because they only had employment income and accepted the pre-filled 730 unchanged, may forfeit a right the law had given them.

Nowhere does the text list investment income among the items that can soak up a loss. That is the asymmetry that caught Chiara out: interest and dividends are always taxed, gross and on receipt, and no capital loss can reduce them. Equally, a year of generous coupons cannot unlock a loss waiting for a gain.

Losses realised before 1 July 2014, when rates were lower, are not worth their full amount. Article 3(13) of Decree-Law 66/2014 lets them be deducted at 48.08% if realised by 31 December 2011, and at 76.92% if realised between 1 January 2012 and 30 June 2014.

Given the four-year limit, those old losses have practically all expired by now. The principle is still worth remembering: what a loss is worth depends on the rate in force when it arose.