5 Tax Mistakes Investors Make! (That Later Cost Them Dearly)

Investing today is more accessible than ever — with a few taps on our phones we can acquire a slice of Apple, invest in the S&P 500 or trade gold. But this technological ease creates a very dangerous illusion: that the tax treatment of these assets is just as simple.

The truth is that between "I made a nice profit" and "I managed to keep it legally" lies a complex maze of tax and financial regulations. Investors (especially those who also run another main business) often fall into traps that wipe out a large part of their returns or expose them to harsh penalties.

Here are the 5 most common (and most expensive) tax mistakes in Bulgaria, plus one key bonus:

1. They don't distinguish between "European market" and "regulated market"

One of the most widespread urban legends is: "If I trade through a European broker, I don't owe capital gains tax." This is fundamentally wrong.

The law (Art. 13(1)(3) of the Personal Income Tax Act, in conjunction with §1, item 11 of the Supplementary Provisions) categorically states that only profits from instruments traded on a Regulated Market within the EU and the EEA are exempt from tax. Both conditions must be met at the same time — the market must be both in Europe and regulated.

What does this mean in practice? Under the European MiFID II Directive, there are various trading venues: Regulated Market (RM), MTF, OTF, OTC (over-the-counter) and so on. To avoid paying the 10% tax on capital gains, the trade must be executed on a classic "regulated market" (for example Xetra in Frankfurt). All other segments and trading venues such as IBKRATS, and exchanges outside the EU (including giants like NASDAQ or NYSE), imply payment of tax on the profit.

The Revolut example: It is often claimed online that Revolut is a "regulated market." In fact, Revolut is a bank (with a banking licence) and acts as an intermediary through a fantastically designed consumer app. The platform itself is not a regulated trading market within the meaning of MiFID II. When you buy US shares through Revolut, the trades are executed in the US, and the profit from them is categorically taxable.

2. Alphabet soup: They confuse ETF, ETC and ETP

Another myth: "Everything traded on an exchange as a fund is tax-exempt."

Under Bulgarian legislation, for an asset to be exempt from taxation (provided it is on a European regulated market), it must be a share, a government security, a right to subscribe for new shares, or a holding in a Collective Investment Scheme (CIS). Most exchange-traded funds (ETFs) that follow the European UCITS rules are precisely such collective investment schemes.

The problem arises with ETCs (Exchange Traded Commodities) and some ETPs (Exchange Traded Products). In the legal and accounting world these are often structured as debt instruments (depositary receipts or notes), rather than as shares or CIS units. Since they do not meet the statutory definition, the capital gains from them are taxed, even if you acquired them on the Frankfurt or Paris exchange. Just one letter of difference in the abbreviation can cost you 10% tax on the entire profit.

3. "Tax Loss Harvesting" — when it saves you and when it's illegal

Tax Loss Harvesting is a legitimate strategy: you sell losing positions at the end of the year to realise a loss that offsets your gains from other trades. This effectively reduces the tax you owe.

The mistake here is twofold. On the one hand, many investors don't do it in time at all, losing a perfectly legal opportunity for tax optimisation and damage reduction. On the other hand, those who do it often do it blindly and cross the line of market regulations (MAR and MAD — the market abuse regulations). If you sell an asset and immediately buy it back with no real change in economic ownership (wash trading), purely to generate a fictitious tax loss, this can be interpreted as market manipulation. The tool is excellent, but it requires careful application in line with the rules.

4. They sleep through the December changes to the tax laws

In Bulgaria, tax laws are traditionally amended (or "rewritten") at the end of each year, usually in November and December, entering into force on 1 January of the following calendar year.

A common mistake among investors is to create the perfect investment strategy, tailored to the current law, and leave it on autopilot for years. A seemingly minor amendment to the provisions can turn a working strategy into an ineffective one, and in the worse case escalate into a genuine tax nightmare with accrued late-payment interest. An annual tax audit of your portfolio is not a luxury, but a necessity.

5. They underestimate the risk of an unexpected VAT registration

This is perhaps the most expensive hidden mistake for entrepreneurs, freelancers and small business owners who invest actively as private individuals.

If you carry out systematic and regular trading in shares, the National Revenue Agency (NRA) may classify this activity as "independent economic activity." And here comes the shock: the turnover from sales of financial instruments counts towards the threshold for mandatory VAT registration (which is BGN 100,000 over 12 consecutive months).

Although the share transactions themselves are exempt from VAT, reaching this turnover effectively obliges you to register. If, alongside your investments, you also have another activity as a private individual (for example consulting services, online trading, or rentals (rentals have many exceptions)), it suddenly turns out that you must charge 20% VAT on that income. This price shock can leave you with a very unpleasant choice: either cut your profit margin by 1/6 (absorbing the tax yourself), or raise your market prices by 20% and risk losing customers.

🎁 Bonus mistake: Options, CFDs and shares are not the same thing

"But I traded shares on a popular online platform — why do I have to pay tax?"

Very often, what you buy in some apps — especially if you use leverage (margin) or open "short" positions — is not a real share at all, but a CFD (Contract for Difference). Derivatives such as CFDs, options and futures are radically different financial instruments from a legal and tax point of view. They do not fall within the scope of the tax exemption. Every realised capital gain from them is subject to declaration and taxation, regardless of which exchange or which country they were traded on!

Successful investing does not end with pressing the "Sell" button on a profit. The real return is the one that stays in your pocket after you have settled your affairs with the tax authorities. Knowing the rules of the game is exactly what distinguishes amateurs from professional investors.