Personal Income Tax (IRPF) taxes the income of each citizen, including in this concept both the income from work, capital or economic activities, as well as capital gains and losses and the imputations of income established by law.

Therefore, capital gains, as well as losses, are a factor to take into account when preparing the Income Tax return , since depending on the amount of each, we can reduce the amount owed to the Treasury through the compensation system.

Now, what is meant by capital gains? And what are losses? We explain which assumptions are contemplated by the regulations in each case and which are exempt from the declaration.

What are capital gains and capital losses?

According to Law 35/2006, of November 28, 2006, on Personal Income Tax , capital gains and losses are “ the variations in the value of the taxpayer's assets that are revealed on the occasion of any alteration in the composition of the assets, unless they are classified as income”.

That is to say, capital gains must include transfers of assets or prizes, while losses include those that are not due to consumption or gambling , which leaves a kind of catch-all into which practically any economic activity we carry out can fit.

However, it is important to be clear about which actions are considered capital gains or losses, because in this way we can adjust what we have to pay to the Treasury based on our real income , making it possible to offset losses against capital gains during the four years following their occurrence. For example, if we record capital gains of 10,000 euros and losses of 8,000, we will only have to pay tax on the difference of 2,000 euros.

What are not changes in assets?

In order to define these figures, the regulations establish a series of cases that are not considered changes in assets and, therefore, should not be applied in the calculation of income. Specifically, the following circumstances are excluded:

• The division of common property , such as the distribution of assets in a divorce case.
• The dissolution of the community property or the termination of the matrimonial economic regime of participation .
• The dissolution of community property or in cases of separation of commoners.
• Capital reductions .
• Profitable transfers due to the death of the taxpayer.
• The lucrative transfers of companies or shares included in article 20.6 of Law 29/1987, of December 28, on the Tax on Inheritances and Donations.
• Compensation arising from legal imposition or judicial resolution, for reasons other than compensatory pension between spouses, in the termination of the matrimonial economic regime of separation of assets .
• Contributions to protected assets established for the benefit of persons with disabilities.

What capital gains and losses are exempt?

The legislation also provides for a series of exemptions from personal income tax on capital gains :

• Those generated on the occasion of donations made to entities that give rise to the right to deduction for donations.
• Those arising from the transfer of the habitual residence by people over 65 years of age or by people in a situation of severe or great dependency .
• Those produced by the payment of the tax debt through the delivery of assets that are part of the Spanish Historical Heritage .
• Those that become evident on the occasion of the transfer, since July 7, 2014, of shares or interests acquired by the taxpayer between July 8, 2011 and September 29, 2013 in newly or recently created companies.
• Income received by the debtor in bankruptcy proceedings , as a result of debt reductions and payments in payment of debts, provided that the debt does not derive from the exercise of economic activities.
• Public aid to offset the costs of buildings affected by the release of the digital dividend .
• Income obtained from the repayment, as a result of agreements entered into with financial institutions, of amounts previously paid to the latter in application of floor clauses .
• In cases of payment in kind of the habitual residence, provided that the owner of the habitual residence does not have other assets or rights in sufficient amount to satisfy the entire debt, capital gains are declared exempt if:
  • They arise from the transfer of the habitual residence of the debtor or the debtor's guarantor.
  • The transfer is by payment in kind or by judicial or notarial foreclosure.
  • It is intended for the cancellation of debts secured by a mortgage on said habitual residence contracted with a credit institution or other entity that professionally carries out the activity of granting mortgage loans or credits.

In addition to these total exemptions, a partial exemption of 50% can also be applied to capital gains from the transfer of urban property acquired for valuable consideration from 12 May 2012 until 31 December 2012 .

In relation to capital losses , the following cannot be attributed to personal income tax:

• The unjustified ones.
• Those due to consumption.
• Those due to lucrative transmissions by "inter vivos" acts or by liberalities.
• Those due to gambling losses obtained in the tax period that exceed the winnings obtained in gambling in the same period
• Those arising from the transfer of assets , when the transferor reacquires them within one year following the date of said transfer.
• Those arising from the transfer of securities or shares admitted to trading in one of the official secondary securities markets, when the taxpayer has acquired homogeneous securities within the two months prior to or after said transfers.
• Those arising from the transfer of securities or shares not admitted to trading in any of the official secondary securities markets, when the taxpayer has acquired homogeneous securities in the year prior to or after said transfers.

What are rollover exemptions?

What happens with the transfer of homes? Are they always considered capital gains that must be taxed in the Personal Income Tax? Since 2015, the Treasury has included an exemption in article 38 for those cases in which a person sells their habitual residence to acquire a new habitual residence.

In this way, the amount obtained from the transfer will not be computed as a profit as long as it is reinvested in the acquisition of a new habitual residence. In the event that more money has been obtained from the sale than the amount contributed to the purchase of the second property, the difference will have to be taxed as a capital gain.

The same applies to investment funds. These financial products do not have to pay taxes in the case of transfer of funds, that is, when you sell to buy new funds, under the same terms as in the previous case.