Drop in share price does not generate a capital loss for Personal Income Tax (IRPF)

Fluctuations in financial markets can cause the market value of an investment to fall drastically. However, for the tax administration, this loss of book value does not always have an immediate tax reflection in the personal income tax return of individuals.

What the DGT has ruled

The Dirección General de Tributos (DGT) has determined that the drop in share price or the exclusion of securities from a securities account does not constitute a transfer of assets. In this sense, the fact that a share loses its market value or ceases to be traded does not imply that the shareholder has lost ownership of their holdings.

In order to compute a capital loss under the assumption of article 37.1, e) of the IRPF Law, a drop in prices is not enough. It is mandatory that the dissolution and subsequent liquidation of the company take place. The tax period in which said loss can be declared will be the one in which the liquidation of the entity is formalized.

What it means for you

If you are an individual shareholder and hold securities that have lost much of their market value or have ceased to be traded on the stock exchange, you cannot automatically reflect that loss in your IRPF. The regulations require a specific legal event: the extinction of the company and the liquidation of its assets.

This criterion establishes a clear distinction between the loss of economic value of an asset and the capital loss with tax effects. As long as the company remains in existence, the ownership of the shares remains intact, regardless of their trading status.

What you should do

In situations of value loss in investment portfolios, it is necessary to analyze the legal nature of the investment and the situation of the issuing company. It is recommended to:

• Verify whether the loss is merely a drop in trading price or if there is an ongoing liquidation process.
• Check whether effective transfer acts have occurred that allow for the recognition of the loss.
• Assess each particular situation with a specialist to determine the appropriate tax timing.