Capital Gains

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Capital gains from the disposal of assets owned by individuals and not used in a business may be either taxable or tax-exempt, depending on factors such as the type of asset and the length of time it has been owned.

In brief:

Capital gains are taxed as part of the annual tax assessment (after the tax return has been submitted).
A capital gain is generally the difference between the sale price and the cost basis of the asset.
Where applicable, account is taken of previously claimed depreciation and previously deferred capital gains, and selling expenses are deducted.

Taxation of the Main Types of Capital Gains

1. Capital Gains on Movable Property

Capital gains realised by individuals on the sale of movable property, such as cars or household furniture, are generally not taxable, unless the sale forms part of a business activity or the assets were acquired for resale at a profit.

2. Capital Gains on Residential Property

A capital gain on the sale of a residential property or a residential occupancy right owned by an individual is the difference between the sale price (less selling expenses) and the cost basis (purchase price or acquisition cost).

The cost basis may be reduced by previously deferred capital gains, and the value of tax-exempt own labour.

Whether a capital gain on the sale of residential property is taxable depends on the period of ownership and the size of the residential property.

The capital gain is tax-exempt if the following conditions are met:

The seller has owned the property for two years or more.
The property is a residential property or a residential occupancy right used as the seller's own residence.

If the residential property was not used as the seller's own residence, the tax treatment depends on the size of the property.

Capital gains on residential property that was not used as the seller's own residence are generally not taxable. However, special rules apply where the volume of the property exceeds:

600 cubic metres for an individual, or
1,200 cubic metres for married couples.

The same threshold (1,200 cubic metres) applies to a surviving spouse who sells residential property that was jointly owned by the spouses at the time of the other spouse's death.

If the volume exceeds these thresholds (and the property was not used as the seller's own residence), the corresponding proportion of the capital gain is taxable, regardless of how long the seller has owned the property.

Example: If an individual sells an 800 cubic metre residential property that was rented out, the capital gain attributable to 200 cubic metres (25%) is taxable.

The capital gain is taxable as capital income if the seller has owned the property for less than two full years.

Taxation may be deferred if the seller:

purchases another residential property or a residential occupancy right, or begins the construction of a new residential property, and
does so within two years of the sale (that is, by the end of the second year following the year of sale).

If both conditions are met, the capital gain is not taxed immediately. Instead, it reduces the cost basis of the new residential property.

This rule applies to residential property located in Iceland, the European Economic Area (EEA), member states of the European Free Trade Association (EFTA), or the Faroe Islands.

If the cost basis (purchase price or acquisition cost) of the new property is lower than the capital gain, the difference is taxed as capital income in the year the new property is acquired.

If no qualifying property is purchased or constructed within the required period, the capital gain becomes taxable as capital income in the second year following the year of sale.

3. Capital Gains on Holiday Homes

Whether a capital gain on the sale of a holiday home is taxable depends on how the property has been used and how long the seller has owned it.

A capital gain on a holiday home is tax-exempt if:

the property has been used by the owners themselves,
the property has not been rented out, and
it has been owned for at least seven years.

If a holiday home is sold and these conditions are not met, the entire capital gain is taxable.

The capital gain is calculated as either:

the difference between the sale price and the cost basis, or
50% of the sale price.

If the seller owned the holiday home before the end of 1978, the 1979 property valuation, adjusted using the official price index coefficient, may be used as the cost basis.

4. Capital Gains on Other Property

Capital gains on the sale of other types of real property, such as stables, boathouses, land or building plots, are taxable as capital income.

The capital gain is calculated as either:

the difference between the sale price and the cost basis, or
50% of the sale price.

5. Capital Gains on Shares

Capital gains from the sale of shares are taxable as capital income.

As a general rule, the capital gain is the difference between the purchase price and the sale price, without indexation.

A capital loss on the sale of shares may be offset against capital gains on the sale of other shares realised during the same tax year. However, losses resulting from the bankruptcy of a company may not be offset against capital gains on other shares.

If the capital gain arises from the sale of shares in companies listed on a regulated securities market or a multilateral trading facility (MTF), it is included in the shared capital income tax-free threshold. Capital income tax is payable only on the portion of the combined capital income that exceeds the threshold.

Under the tax-free threshold, capital income tax is payable only on the amount exceeding 300.000 ISK per year for individuals and 600.000 ISK per year for married couples and jointly assessed cohabiting partners.

The capital income tax-free threshold is shared across interest income, dividends and capital gains from shares in companies listed on a regulated market or a multilateral trading facility (MTF).

If shares were acquired before the end of 1996, you may choose between two methods for determining their acquisition cost when calculating a capital gain or capital loss:

Index the purchase price to the end of 1996, or
Use the adjustment value (jöfnunarverðmæti) shown on the annual shareholding statement issued to shareholders after the end of each year.

If the seller acquired the shares between 1990 and 1996, part of the capital gain may be tax-exempt. This applies to shares in companies that had received approval from the Director of Internal Revenue for tax relief.

Under these rules, the maximum tax-exempt capital gain is 367,625 ISK for an individual and 735,250 ISK for married couples.

Spreading Capital Gains

If part of the sale price of an asset is paid by means of a promissory note with a term of at least three years, the corresponding part of the capital gain may be spread over the repayment period for tax purposes, for up to seven years.This does not include debts secured against the property that the purchaser assumes responsibility for.

The right to spread the capital gain is lost if the promissory note is sold.

Special rules apply to gains from the sale of farms used for agricultural activities, allowing the capital gain to be spread over 20 years.