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💰 Taxation & Tax Efficiency

Understanding taxation is essential for maximizing long-term investment returns. This page covers the theoretical foundations — not jurisdiction-specific rules — of how taxes interact with portfolio growth.

Not financial advice

LibreFolio does not provide tax advice. Every jurisdiction has different rules regarding tax rates, holding periods, loss carry-forward, and matching methods. Consult a qualified tax professional for your specific situation.

📊 Capital Gains & Losses

When you sell an asset, the difference between the sale price and the purchase price determines your capital gain or capital loss:

\[ \text{Capital Gain} = P_{sell} - P_{buy} - \text{Fees} \]
  • Capital Gain (\(> 0\)): You sold for more than you paid → taxable event in most jurisdictions
  • Capital Loss (\(< 0\)): You sold for less than you paid → may offset future gains

🔄 Realized vs Unrealized

Type Definition Tax Impact
Unrealized (paper gain/loss) Asset still held; gain/loss exists only on paper Not taxed (in most jurisdictions)
Realized Asset sold; gain/loss is locked in Typically triggers a tax event

This distinction is the foundation of tax deferral — by not selling, you defer the tax event indefinitely.

📋 Matching Methods

When you've bought the same asset multiple times at different prices, which purchase does a sale match against?

Method Rule Effect
FIFO (First In, First Out) Oldest shares sold first Most common default
LIFO (Last In, First Out) Newest shares sold first May minimize/maximize gains
Specific Identification You choose which lot to sell Maximum tax optimization

LibreFolio uses FIFO

LibreFolio computes capital gains using FIFO matching at runtime. The matching is calculated on-demand, not stored in the database.

🔄 Loss Carry-Forward

Most jurisdictions allow you to carry forward capital losses to offset future capital gains:

\[ \text{Taxable Gain}_t = \max(0, \text{Realized Gains}_t - \text{Carried Losses}_{t-1}) \]

Key parameters that vary by jurisdiction:

  • ⏳ Duration: How long losses can be carried (e.g., 4 years in Italy, unlimited in Germany, 7 years in the US for certain types)
  • 📊 Scope: Whether losses from one asset class can offset gains from another
  • 🚫 Wash sale rules: Restrictions on re-buying a sold asset within a short window to claim the loss

⏳ Tax Deferral Advantage

One of the most powerful concepts in tax-efficient investing is deferring the tax event as long as possible. The mathematics strongly favor deferral:

📐 The Formula

Compare two scenarios over \(n\) years with annual return \(r\) and tax rate \(\tau\):

Scenario A — Tax annually (e.g., distributing fund):

\[ V_A = P \cdot (1 + r \cdot (1 - \tau))^n \]

Scenario B — Tax at the end (e.g., accumulating fund):

\[ V_B = P \cdot (1 + r)^n - \tau \cdot [P \cdot (1 + r)^n - P] = P \cdot [(1 + r)^n \cdot (1 - \tau) + \tau] \]

📊 Numerical Example

With \(P = 10{,}000\), \(r = 7\%\), \(\tau = 26\%\), \(n = 20\) years:

Scenario Final Value Effective Return
Tax annually €28,398 5.18% p.a.
Tax at end €31,616 5.93% p.a.
Deferral advantage +€3,218 +0.75% p.a.

The advantage grows exponentially with time — over 30 years, the gap widens to over €8,000 on the same €10,000 investment.

📦 Accumulating vs Distributing Instruments

This deferral advantage manifests directly in the choice between accumulating and distributing investment vehicles:

📈 Accumulating (e.g., Acc ETFs)

  • Dividends are reinvested internally by the fund
  • No taxable event until you sell the fund shares
  • Full benefit of compound growth on the pre-tax amount
  • Ideal for long-term investors seeking maximum growth

💵 Distributing (e.g., Dist ETFs)

  • Dividends are paid out to you periodically
  • Each distribution is a taxable event (taxed immediately)
  • You receive cash but lose the compounding benefit on the taxed portion
  • Useful if you need income from your investments

🔗 Connection to Growth Models

  • Linear Growth approximates the behavior when dividends are received but not reinvested — growth is additive
  • Compound Growth represents the ideal case with full reinvestment — growth is multiplicative and benefits most from tax deferral

⚠️ Jurisdiction-Specific Considerations

Every country has its own tax framework. Key parameters that vary:

Parameter Examples
Tax rate on capital gains 26% (Italy), 25% (Germany), 0-20% (US, depending on holding period)
Holding period benefits Some countries reduce rates for long-term holdings
Loss carry-forward duration 4 years (Italy), unlimited (Germany), 7 years (US for some types)
Double taxation treaties Affect dividends from foreign stocks
Tax-free allowances Annual thresholds below which gains are not taxed
Crypto-specific rules Rapidly evolving; often treated differently from traditional assets

LibreFolio's role

LibreFolio tracks your transactions and computes realized gains/losses using FIFO matching. It provides the data foundation for tax reporting, but does not generate tax declarations or apply jurisdiction-specific rules. Export your transaction data and consult a tax professional.