Investing in stocks can be profitable, but it also comes with tax obligations that should not be overlooked. In Bulgaria, the taxation process for income from stock trading depends on whether the transactions are conducted on a regulated or unregulated market, as well as the source of income – capital gains, dividends, or interest. Understanding these rules will not only help you avoid penalties but also allow you to optimize your tax burden. In this article, we will examine the key aspects of stock trading taxation, as well as useful strategies for reporting and reducing owed taxes.
Types of Income from Stocks and Financial Instruments
Individuals can receive various types of income from financial instruments, including:
- Capital gains – the difference between the selling price and the purchase price of stocks.
- Dividends – distribution of a company’s profits to shareholders.
- Interest – from investments in bonds or other fixed-income instruments.
- Income from derivatives – including futures, options, CFDs, and other contracts based on assets.
Taxation of Stock Trading Income
Individuals who sell stocks and generate profits are subject to taxation as follows:
- 10% tax on capital gains (the difference between the purchase and selling price).
- Profits from the sale of stocks traded on regulated markets in the EU and EEA are tax-exempt.
- Losses cannot be offset against other income but can be carried forward to future years in certain cases.
Important: To take advantage of the exemption, you must have documents proving that the transactions were conducted on a regulated market.
Taxation of Dividends
- Dividends from Bulgarian companies
- Subject to a 5% final tax, which is withheld at the source and directly transferred to the National Revenue Agency (NRA).
- Individuals are not required to file an additional declaration if they receive dividends from Bulgarian companies.
- Dividends from foreign companies
- Taxed according to international agreements for avoiding double taxation.
- If no such agreement exists between Bulgaria and the respective country, dividends are usually subject to a 10% tax.
- Taxes paid abroad may be credited against liabilities in Bulgaria, but proof of tax payment is required.
- Dividends from companies in the EU and EEA
- In most cases, they are not subject to additional taxation in Bulgaria if taxed in the source country.
- Some specific jurisdictions may still require additional taxation depending on bilateral agreements.
Taxation of Income from Bonds and Other Financial Instruments
- Interest from bonds issued by Bulgarian entities
- In most cases, this interest is tax-exempt for individuals.
- For legal entities, tax treatment may vary depending on revenue structure.
- Interest from foreign bonds
- Subject to a 10% tax if no special agreement exists between Bulgaria and the respective country.
- If a double taxation avoidance treaty is in place, the interest may be taxed at a lower rate or exempt from additional tax in Bulgaria.
- It is advisable to check local regulations and obtain tax payment certificates from the foreign country.
Declaring Income
Individuals who have earned income from financial instruments must declare it in the annual tax return:
- The tax return must be submitted by April 30 of the year following the income receipt.
- Appendix 5 – for capital gains and financial instrument income.
- Appendix 8 – for income from foreign sources.
Important: If you have received income from abroad, you may be required to provide documents proving tax payments in the respective country.
How to Optimize Your Portfolio to Pay Less Tax?
Invest in Stocks on a Regulated Market in the EU
- If you sell stocks traded on a regulated market in the EU and EEA, your profits are tax-exempt.
Use a Long-Term Strategy for Capital Gains
- Frequent buying and selling of stocks lead to accumulating tax liabilities.
- Holding investments long-term allows you to defer taxation and benefit from asset growth without annual tax payments.
Diversify Investments into Tax-Efficient Assets
- Dividends from Bulgarian companies are taxed at 5%, but those from EU and EEA companies are often not subject to additional taxation.
Offset Capital Losses Against Gains
- If you have incurred losses from stock sales during the year, you can use them to reduce your tax base.
Invest Through Companies Instead of as an Individual
- If you trade actively, setting up a Limited Liability Company (LLC) or another business structure may reduce tax liability.
Conclusion
Income from stocks and financial instruments is subject to specific tax regulations, and applying the correct provisions depends on the type of transactions and the source of income. To avoid errors and penalties, keeping proper documentation and submitting tax returns on time is essential. If you have questions or need assistance, consult a tax expert.
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