Capital gains and the deemed acquisition cost

Deemed acquisition cost

You can use the deemed acquisition cost: the purchase price is assumed to be 20% (under 10 yrs) or 40% (≥10 yrs) of the sale price. The tax authority automatically uses whichever is more favorable. For investments held for a long time that have risen a lot, the 40% deemed cost can reduce the tax significantly.

The deemed acquisition cost is a useful special feature for investors in Finland. Instead of calculating the actual purchase price, you can let the tax authority assume that the purchase price is a fixed share of the sale price: 20% for holdings of under 10 years and 40% after holding for at least 10 years. The tax authority automatically uses whichever method is more favorable to you. So for an investment held for a long time that has risen a lot, only 60% of the sale price is taxable gain. Patience is rewarded in taxation too.

The deemed acquisition cost in an example

An example makes the benefit of the deemed cost concrete. You bought shares for €5,000 and sell them 12 years later for €20,000. The actual gain is €15,000, and the tax on it would be 30% = €4,500. With the 40% deemed acquisition cost, the purchase price is assumed to be 40% × 20,000 = €8,000, so the taxable gain is only €12,000 and the tax €3,600. Here the deemed cost saves €900. The more the investment has risen and the longer it has been held, the bigger the benefit.

FIFO and the order of sales

When you have bought the same share or ETF on several occasions and sell part of it, the tax authority assumes that you sell the ones bought first, first (FIFO, first in first out). This matters because the oldest lots have often risen the most and qualify for the larger deemed acquisition cost (40% for holdings of at least 10 years). On an ordinary account you cannot choose the FIFO order yourself, so it is good to take it into account when you plan sales. An accumulating ETF keeps this simpler, because the fund reinvests the dividends itself and they don't create new purchase lots for you.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.