Surprising SAC judgment on taxation of income from sale of securities by individuals

The Supreme Administrative Court (SAC) opined on how individuals should proceed when determining the tax base for the sale of securities in foreign currencies (2 Afs. 4/2019 -38). The court held that the Income Tax Act gives taxpayers the option to choose the manner of determining the exchange rate but not the time of the valuation of the expense/income. So far, the approach generally applied in practice has been that expenses were converted using an annual exchange rate applicable for the year of the sale of securities, rather than the exchange rate applicable for the year of their acquisition.

A taxpayer purchased securities for US dollars in 2011 and sold part of them in 2012 – within 6 months from their acquisition – also for a price in US dollars. For the purpose of determining the tax base, they converted the income (proceeds) from the sale using the annual exchange rate applicable for 2012; against this income, they deducted the expenses (costs) calculated using the same exchange rate.

The tax administrator disagreed and converted the expenses (costs) of the securities’ acquisition using the annual exchange rate for 2011. This resulted in a reduction of the taxpayer’s expenses and assessment of additional tax (as the exchange rate was less advantageous for the taxpayer than the one for 2012). The case proceeded to the Supreme Administrative Court, which confirmed the tax administrator’s opinion.

The SAC stated that the Income Tax Act gives taxpayers who do not keep accounting books the option to choose from two alternative conversion rates: a fixed exchange rate (set for the year), and a foreign exchange market rate (applied pursuant to the Accounting Act). Had the taxpayer been using the foreign exchange market rate, they would have been applying the rate valid at the time of effecting the ‘accounting transaction’, i.e. the date securities were purchased. The SAC was convinced that taxpayers must proceed analogously even if they choose to apply the annual conversion rate. This means, that the relevant rate would, logically, be the annual exchange rate set for the period when the securities were purchased. The SAC thus concluded that while the Income Tax Act allows taxpayers to choose the manner of determining the exchange rate, it does not allow them to choose the manner of determining the point in time of the valuation of the expense or income.

Considering the recent strengthening of the Czech crown, this SAC decision may be beneficial for individuals trading in securities. 

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