When building and managing an investment portfolio, taxation is an element that is often underestimated, yet over the long term it can have a significant impact on overall performance. Understanding the different tax regimes and the rules governing the offsetting of gains against losses is essential to avoiding inefficiencies and optimising results.
The three principal tax regimes
In Italy there are three tax regimes for investments:
- Administered regime
This is the most widespread. In this case the intermediary (bank or broker) calculates and remits taxes directly. For example, if a dividend of €200 is received from an Italian share, the intermediary withholds 26% (€52) and credits the remaining €148 to the account. Taxation is immediate and there is no need to report the transaction in the annual tax return.
One important point: in order to automatically offset gains and losses, the order of sale matters. Selling the loss-making investment first and the profitable one second allows capital losses to be offset immediately, avoiding unnecessary tax charges. Doing the opposite can generate an avoidable tax cost.
- Declaratory regime
Here it is the investor who enters the data in the tax return.
The advantage is that offsetting gains and losses can be carried out at year-end, without constraints on the order of sale. The disadvantage is the greater administrative complexity, which is often handled through an accountant or tax assistance centre.
- Managed regime
This is the regime that is fiscally and financially least efficient, and it relates principally to discretionary portfolio management services. There are two reasons for this, and both are highly significant:
- Loss of the power of compound interest: taxation is applied on accrued gains, not on gains actually realised. This means that each year a portion of the return is taken by the tax authorities before it can be reinvested, drastically reducing the ability of capital to grow over time. Over the long term, this erosion can make the difference between a strongly growing portfolio and one that struggles to outpace inflation.
- High management costs: discretionary portfolio management services carry average annual fees of 1.72% (source: Mediobanca Securities, 1 February 2023 – Italian Asset Gatherers), to which implicit costs related to the instruments used are often added. In the majority of discretionary portfolio management services offered by banks and distribution networks, including some of the most prominent, particularly those based on investment funds, the overall cost level frequently exceeds 2.50%, with extreme cases approaching 4.00%.
These charges compound with the advance taxation, creating a “double brake” on capital growth.
In relation to this tax regime, attention should be drawn to Unit-Linked insurance policies, an instrument widely used by banks, distribution networks, and Poste Italiane, and therefore extensively present in the portfolios of private clients and businesses.
Unit-Linked policies, although also managed by an intermediary, have a different tax characteristic: taxation is applied only upon redemption, and not on gains accrued year by year. In this respect, they are more efficient than discretionary portfolio management services, because they allow capital to benefit fully from compound interest up to the point of disinvestment.
However, this tax efficiency is often neutralised by very high annual charges, which in some cases significantly exceed 5.00%. Fees of this magnitude can substantially erode returns over the medium to long term, rendering the product uncompetitive, particularly when compared with more transparent, low-cost investment solutions.
The result is that, both under the traditional managed regime and with many Unit-Linked policies, the investor risks seeing a large portion of gross return absorbed by costs and, in the case of discretionary portfolio management, by advance taxation as well.
Capital gains and income from capital
Income generated by a financial instrument may fall into one of two tax categories:
- Capital gains (redditi diversi): may be offset against each other (gains and losses).
- Income from capital (redditi di capitale): may not be offset against other income.
This distinction is crucial, as it determines whether or not losses can be recovered for tax purposes.
| FINANCIAL INSTRUMENT | INCOME TYPE | OFFSETTING |
| Equities (Capital Gain) | Capital gains | yes |
| Equities (dividend) | Income from capital | no |
| Bonds (Capital Gain) | Capital gains | yes |
| Bonds (coupons) | Income from capital | no |
| ETFs (Capital Gain) | Income from capital | no |
| ETFs (coupons) | Income from capital | no |
| Funds (Capital Gain) | Income from capital | no |
| Funds (coupons) | Income from capital | no |
| Certificates (Capital Gain) | Capital gains | yes |
| Certificates (coupons) | Capital gains | yes |
| ETCs (Capital Gain) | Capital gains | yes |
| Futures – Options (Capital Gain) | Capital gains | yes |
Practical example:
An ETF generates a gain of €2,400 (income from capital) and another ETF a loss of €1,200 (capital gains). It is not possible to offset the two results: 26% will be paid on the gain of the profitable ETF (€624) and the loss will remain in the “tax backpack” for a maximum of four years, awaiting offset against future capital gains.
The strategic use of tax offsetting
A useful case: purchasing a certificate that pays monthly coupons. If prior capital losses are held in the “tax backpack”, the coupons (capital gains) can be used to absorb them. For example, with a capital loss of €800, the first 16 coupons of €50 would progressively eliminate it entirely. Only thereafter would 26% begin to be applied to subsequent coupons.
Tax rates
In general, the tax rate is 26%.
Exceptions apply to Italian government bonds and equivalent instruments, which benefit from a reduced rate of 12.5%.
This category includes:
- Italian government securities (BTPs, BOTs, CCTs, etc.).
- Bonds issued by supranational entities such as the EIB (European Investment Bank), IBRD (International Bank for Reconstruction and Development), EBRD (European Bank for Reconstruction and Development).
- Bonds issued by international organisations to which Italy adheres, such as the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM).
- Securities issued by Italian territorial authorities (Regions, Provinces, Municipalities) if classified as equivalent to government bonds.
- Foreign government bonds issued by countries on the MEF white list, i.e. those that guarantee adequate exchange of tax information with Italy (e.g. German Bunds, French OATs, Spanish Bonos, US Treasuries, UK Gilts, etc.).
Example: a gain of €3,000 on a BTP would be taxed at 12.5% (€375). The same gain on a bank bond would be taxed at 26% (€780).
Intermediate taxation for instruments with mixed underlying assets
Not all instruments fall neatly into either the 26% or 12.5% tax category.
There are indeed products — such as bond ETFs, collective investment funds, or certificates — that invest in baskets of securities composed of both instruments taxed at 26% and instruments taxed at 12.5%.
In such cases, the rate applied to the client is not one of the two “full” rates, but a weighted average tax rate based on the composition of the portfolio.
Practical example:
- A bond ETF holds 60% of its portfolio in Italian government bonds and 40% in corporate bonds.
- The government bond portion is taxed at 12.5%, the corporate portion at 26%.
- The effective rate applied to the ETF’s gain will therefore be a weighted average:
(60% × 12.5%) + (40% × 26%) = 17.9%.
This particularity can make certain instruments more advantageous from a tax perspective than others with similar gross returns but taxation entirely at 26%. For this reason, when selecting instruments it is important to analyse the composition of the underlying portfolio, particularly with a view to optimising net returns.
Why fiscal diversification also matters
Many portfolios offered by banks consist almost exclusively of investment funds, which are fiscally inefficient because losses cannot be offset. Careful portfolio management involves including instruments that also generate capital gains income — such as equities, certificates, and bonds — in order to broaden the possibilities for recovering capital losses.
An effective approach is the Core-Satellite model:
- Core: the central and strategic portion of the portfolio, built with diversified ETFs.
- Satellite: a more tactical portion, composed of individual equities, bonds, and selected certificates, which is also useful for improving tax efficiency.
Conclusion
Taxation is not a peripheral consideration but an important lever for optimising portfolio returns.
Among the three regimes, the managed regime is by far the most penalising: it taxes gains before they can generate further returns and imposes significant annual costs that accumulate over time. Unit-Linked policies, although benefiting from more favourable tax treatment in terms of timing, often carry costs so high as to neutralise most of the advantages.
A well-informed investor must understand these limitations and carefully evaluate whether adopting such solutions is truly worthwhile.