Tax Backpack: What It Is and How to Use It to Recover Capital Losses

Understanding the Tax Backpack and Recovering Losses

In Italy, an increasing number of people are venturing into investments beyond traditional safe options that offer minimal returns.
Individuals are now seeking to maximize earnings through stocks, bonds, mutual funds, ETFs (Exchange Traded Funds), derivatives, and certificates.

Since 2014, these financial products have been subject to a new taxation on returns, raised from 20% to 26%.
Exceptions include State bonds, equivalent securities, foreign State bonds from White List countries, bonds issued by supranational entities, and savings bonds for southern Italy, which remain taxed at 12.5%.

To counterbalance the 26% tax on profits, a mechanism was introduced to offset losses and gains in investments, technically known as capital losses and capital gains.
This tool is commonly referred to as the “tax backpack.” Let’s delve into what it entails and how it operates.

The Tax Backpack: Definition and Usage to Recover Losses

What is the Tax Backpack?
The term “backpack” typically evokes the image of a bag used to carry books or everyday items, or necessities for a journey or daily life.
Similarly, the tax backpack allows individuals to carry capital losses to offset against capital gains, leading to a tax advantage.
This enables the 26% tax rate on gains to apply only to the remaining portion after covering the losses.

How to Use the Tax Backpack?
To simplify, let’s consider an example: In a year, profits of 100 euros are realized from the sale of stock X, on which 26 euros (26%) would need to be paid in taxes.
Simultaneously, there are capital losses of 40 euros on stock Y due to their sale, representing the difference between purchase and sale prices.

The tax backpack enables the offsetting of losses with gains, allowing taxes to be paid on only a portion of the profits.
This results in tax savings.
If the current year’s gains are insufficient to offset losses, the tax backpack allows the carrying forward of remaining losses to future years.
By declaring these losses in the income tax return, individuals can gradually recoup these losses and avoid paying taxes on gains.

To recover losses, certain limitations apply.
Minusvalences can only be offset with gains from similar financial products.
Capital losses can be offset only with financial products generating different income, not capital income.

The ability to recover losses highlights the importance of accurate tax planning and transparency in financial dealings.
As the fiscal landscape evolves with ongoing reforms, understanding the intricacies of tax implications becomes pivotal in making informed investment decisions and optimizing financial outcomes.