Income Tax Return and Investment of Individuals on the Stock Exchange

On May 31, a little more than 34 million income tax returns were filed, according to a report by the Brazilian Federal Tax Authority. A growth of approximately 7% compared to the previous year. This growth also occurred, in a more agressive manner, in the number of accounts opened with the São Paulo Stock Exchange (referred to as “B3”), which almost doubled in comparison with 2019. According to B3, in 2020 1.5 million accounts were opened by individuals operating in the capital markets, which represented an increase of 92% in comparison with 2019.

This is good news, correct? Certainly, the answer is yes. The interesting thing is that the growth in the number of declarations and in the number of new investors, apparently, still needs to be understood when it comes to reporting earnings to the Tax Authorities.

There is no concrete data on the number of transactions with shares traded on the stock exchange reported to the Tax Authorities. Or even the percentage of growth of this information in relation to 2019. If it were possible to collect data to run statistics on this matter, I dare say that the result would be in the opposite direction of the growth indicated above. In Other words, a negative correlation.

Our team prepares and reviews hundreds of income tax returns. And this year, it was possible to verify a recurring fact with those investors who accessed the capital markets in 2020. This suspicion that the increase in investment with B3 was inversely proportional to the information on earnings is due to the fact that none of these investors had the information about their transactions. It was incredibly difficult to get the details of all the information to correctly report to the Tax Authorities.

But, why? There are some explanations.

First: The investor can freely trade on B3’s over-the-counter market, buying and selling shares. In essence, They should register the history of the trsnactions throughout the whole process. However, since this is new to most of the new investors, such registration is not yet part of their routine. B3 could in fact join forces with the Federal Tax Authorities in order to instruct these individuals on how to proceed in such cases (#getthehint).

Second: Many of these investors are not in the habit of seeking help with their income tax returns. Filling in the income tax returns is in fact self-explanatory. However, the complexity and volume of transactions may demand the need to request additional assistance.

Third. The fund managers and administrators, in some cases, do not submit earnings reports. We realized in our works that the delivery of such earning reports by these institutions only occurred when requested. It is very likely that many investors who do not receive the information may not have been aware that they should have asked for such with these institutions. It is important that all these taxpayers request the earnings reports with their respective institutions. The absence of such information could result in the taxpayer being subject to a scrutiny from the Federal Tax Authorities, the so called “malha fina”.

The development and maturity of the capital markets needs to involve an understanding of the rules for submitting correct information to the Federal Tax Authorities. These growths are positive. However, this growth comes with educating the investor in such matters as well as instructing the proper filling in of the income tax returns.

By Alamy Candido

partner at Candido Martins advogados.