Capital gains tax

For all other forms of taxation, see tax

A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

For equities, an example of a popular and liquid asset, each national or state legislation, have a large array of fiscal obligations that must be respected regarding capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state, or that tax free stock market operations are useful to boost economic growth.

Tax systems

Argentina

There is no capital gains tax charged in Argentina.

Australia

Main article: Capital gains tax in Australia

Capital gains tax in Australia is only payable upon realized capital gains, except for certain provisions relating to deferred-interest debt such as zero-coupon bonds. The tax is not separate in its own right, but forms part of the income tax system. The proceeds of an asset sold less its 'cost base' (the original cost plus addition for cost price increases over time) are the capital gain. Discounts and other concessions apply to certain taxpayers in varying circumstances. From the 21st of September 1999, after a report by Alan Reynolds the 50% capital gains tax discount has been in place for individuals and some trusts that acquired the asset after that time and have held the asset for more than 12 months, however the tax is levied without any adjustment to the cost base for inflation. The amount left after applying the discount is added to the assessable income of the taxpayer for that financial year.

For individuals, the most significant exemption is the family home. The sale of personal residential property is normally exempt from Capital Gains Tax, except for gains realized during any period in which the property was not being used as a persons personal residence (for example, being leased to other tenants) or portions attributable to business use. Capital gains or losses as a general rule can be disregarded for CGT purposes when assets were acquired before 20 September 1985 (pre CGT).

Barbados

There is no capital gains tax charged in Barbados.

Belgium

Under the participation exemption, capital gains realised by a Belgian resident company on shares in a Belgian or foreign company are fully exempt from corporate income tax, provided that the dividends on the shares qualify for the participation exemption. For purposes of the participation exemption for capital gains the minimum participation test is not required. Unrealised capital gains on shares that are recognised in the financial statements (which recognition is not mandatory) are taxable. But a roll-over relief is granted if, and as long as, the gain is booked in a separate reserve account on the balance sheet and is not used for distribution or allocation of any kind.

As a counterpart to the new exemption of realised capital gains, capital losses on shares, both realised and unrealised, are no longer tax deductible. However, the loss incurred in connection with the liquidation of a subsidiary company remains deductible up to the amount of the paid-up share capital.

Other capital gains are taxed at the ordinary rate. If the total amount of sales is used for the purchase of depreciable fixed assets within 3 years, the taxation of the capital gains will be spread over the depreciable period of these assets.

Belize

There are no capital gains taxes for residents or non-residents in Belize.

Brazil

Capital gains tax is set at 15%, payable the following month after the sale in the case of shares.

Bulgaria

Capital gains tax is 10 % since 1st of January 2007.

Canada

Currently 50.00% of realized capital gains are taxed in Canada at an individual's tax rate. Some exceptions apply, such as selling one's primary residence which may be exempt from taxation.

For example, if your capital gains (profit) is $100, you're only taxed on $50 at your marginal tax rate. That is, if you were in the top tax bracket you'd be taxed at approx 43%. Formula for this example using the top tax bracket would be as follows:

(Capital gain x 50.00%) x marginal tax rate = capital gain tax

= ($100 x 50.00%) x 43%

= $50 x 43%

= $21.50

In this example your capital gains tax on $100 is $21.50, leaving you with $78.50.

The formula is the same for capital losses and these can be carried forward indefinitely to offset future years' capital gains; capital losses not used in the current year can also be carried back to the previous three tax years to offset capital gains tax paid in those years.

Unrealized capital gains are not taxed.

China

The applicable tax rate for capital gains in China depends upon the nature of the taxpayer (i.e. whether the taxpayer is a person or company) and whether the taxpayer is resident or non-resident for tax purposes.

Tax resident enterprises will be taxed at 25% in accordance with the Enterprise Income Tax Law. Non-resident enterprises will be taxed at 10% on capital gains in accordance with the Implementing Regulations to the Enterprise Income Tax Law.

Denmark

Share dividends and realized capital gains on shares are charged 28% to individuals of gains up to DKK 45,500 (2007-level, adjusted annually), and at 43% of gains above that. As of 1 January 2008, an additional marginal rate of 45% will apply to gains above DKK 100,000 (2007-level, adjusted annually) per year. Carryforward of realized losses on shares is allowed.

Individuals' interest income from bank deposits and bonds, realized gains on property and other capital gains are taxed up to 59%, however, several exemptions occur, such as on selling one's principal private residence or on gains on selling bonds. Interest paid on loans is deductible, although in case the net capital income is negative, only approx. 33% tax credit applies.

Companies are taxed at 25%. However, for instance, realized gains on shares owned more than three years are tax exempt and only 66% of share dividends are subject to taxation. Carryforward of realized losses on shares owned less than three years is allowed.

Ecuador

Ecuador does not have capital gains tax for income gained abroad.

Egypt

There is no capital gains tax.

Estonia

There is no separate capital gains tax in Estonia. All earned income from capital gains is taxed the same as regular income, the rate of which currently stands at 21% and is expected to drop to 20% by 2009 (on Nov 18 2008 The Parliament of Estonia passed the amendment to postpone the tax reduction for one year).

Finland

The capital gains tax in Finland is 28% on realized capital income.

France

For residents, capital gains tax is a flat 30.1%, which includes 12.1% of social security taxes. If shares are held in a special account (called a PEA) which must be open for at least five years, the gain is only subject to social security taxes. The maximum amount that can be deposited in the PEA is €132,000. There is no tax if shares worth up to around €25,000 (limit raised every year) are sold in a given year. The gain realized on the sale of a principal residence is not taxable. Also, a gain realized on the sale of other real estate held at least 15 years is not taxable.

Germany

Germany has introduced a very strict capital gains tax for shares, funds, certificates etc. in January 2009 (called as Abgeltungsteuer in German). Capital gains tax will only apply to financial instruments (shares, bonds etc) if they have been bought after 31.12.2008. Instruments bought before this date are capital gains tax exempt (assuming that they are held for at least 12 months), even if they are sold in 2065 or later, barring a change of law. Special treatments of certificates, which only qualify for tax exemption if they have been bought before 15.03.2007.

Real estate will still be free of capital gains tax if held for more than ten years. The German capital gains tax will be 25% plus Solidaritätszuschlag (add on tax to finance the 5 eastern states of Germany - Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt, Thuringia and Brandenburg - and the cost of the reunification) plus Kirchensteuer (church tax) effectively coming to about 28%. No deductions of cost like custodian fees, travelling to and from annual shareholder meetings, legal and tax advice, interest paid on loans to buy shares etc. will be allowed any more from 2009 on.

Hong Kong

In general Hong Kong has no capital gains tax. However, employees who receive shares or options as part of their remuneration are taxed at the normal Hong Kong income tax rate on the value of the shares or options at the end of any vesting period less any amount that the individual paid for the grant.

If part of the vesting period is spent outside Hong Kong then the tax payable in Hong Kong is pro-rated based on the proportion of time spent working in Hong Kong. Hong Kong has very few double tax agreements and hence there is little relief available for double taxation. Therefore, it is possible (depending on the country of origin) for employees moving to Hong Kong to pay full income tax on vested shares in both their country of origin and in Hong Kong. Similarly, an employee leaving Hong Kong can incur double taxation on the unrealized capital gains of their vested shares.

The Hong Kong taxation of capital gains on employee shares or options that are subject to a vesting period, is at odds with the treatment of unrestricted shares or options which are free of capital gains tax.

Hungary

Since 1st of September 2006 there is one flat tax rate (20%) on capital income. This includes: selling stocks, bonds, mutual funds shares and also interests from bank deposits. Starting 2010 January, Hungarian citizens are allowed to open special "long-term" accounts. Every capital gains earned in securities held on these accounts have a capital gains tax rate of 10% after 3 years holding period, and 0% after the accounts' maximum 5 years period is expired.

Iceland

From 1. of January 2010 the capital gains tax in Iceland is 18%. Before it was 15% for about 6 months as it was raised from 10% in July 2009.

2008 - 10%

2009 until 31st of June - 10%

2009 from 1st of July - 15%

2010 - 18%

India

As of 2008, equities are considered long term capital if the holding period is one year or more. Long term capital gains from equities are not taxed if shares are sold through recognised stock exchange and STT is paid on the sale . However short term capital gain from equities held for less than one year, is taxed at 10% (As on Budget 2009-10) (plus surcharge and education cess). This is applicable only for transactions that attract Securities Transaction Tax (STT).

Many other capital investments (house, buildings, real estate, bank deposits) are considered long term if the holding period is 3 or more years. Short term capital gains are taxed just as any other income and they can be negated against short term capital loss from the same business.

Ireland, Republic of

Since 7 April 2009, there is a 25% tax on capital gains, with several exclusions and deductions (e.g. agricultural land, primary residence, transfers between spouses). Gains made where the asset was originally purchased before 2003 attract indexation relief (the cost of the asset can be multiplied by a published factor to reflect inflation). Costs of purchase and sale are deductible, and every person has an exempt band of €1,270 per year.

The tax rate is 23% on certain investment policies, and rises to 40% on certain offshore gains when they are not declared in time.

Tax on capital gains arising in the first eleven months of the year must be paid by December 15, and tax on capital gains arising in the last month of the year must be paid by the following January 31.

Isle of Man

There is no capital gains tax.

Israel

Capital gains tax in Israel is a flat rate of 20%.

Italy

Capital gains tax of corporate income tax 27.5 % (IRES) on gains derived from disposals of participations and extraordinary capital gains.

Jamaica

There are no capital gains taxes in Jamaica.

Japan

In Japan, there are two options for paying tax on capital gains. The first, Withholding Tax (源泉課税), taxes all proceeds (regardless of profit or loss) at 1.05%. The second method, declaring proceeds as "taxable income" (申告所得), requires individuals to declare 26% of proceeds on their income tax statement.

Many traders in Japan use both systems, declaring profits on the Withholding Tax system and losses as taxable income, minimizing the amount of income tax paid.

Lithuania

Capital gains tax is 15 %.

Malaysia

There is no capital gains tax for equities in Malaysia. Malaysia used to have a capital gains tax on real estate but the tax was repealed in April 2007. Malaysia has imposed capital gain tax on share options and share purchase plan received by employee starting year 2007.

Mexico

There is a capital gains tax in Mexico.

Moldova

Under the Moldovan Tax Code a capital gain is defined as the difference between the acquisition and the disposition price of the capital asset. Only this difference (i.e. the gain) is taxable. The applicable rate is half (1/2) of the income tax rate, which for individuals is 18% and for companies was 15% (but in 2008 is 0%). Therefore, in 2008 the capital gain tax rate is 9% for individuals and 0% for companies.

Not all types of assets are "capital assets". Capital assets include: real estate; shares; stakes in limited liability companies etc.

Netherlands

There is no capital gains tax in the Netherlands.

However a "theoretical capital yield" of 4% is taxed at a rate of 30%. In other words, all property and savings (with the exception of owner-occupied dwelling, pensions, approved "green" investments and monies below a certain threshold) are taxed at 1.2% as a substitute for capital gains tax. Also, dividends and "proceeds (Dutch: vervreemdingswinsten) from significant stakes" (e.g. 5% or more of the ownership of a company) are taxed at 15%. So the latter can be seen as a capital gains tax.

New Zealand

New Zealand does not have a capital gains tax in most cases. However, certain capital gains are classified as taxable income in New Zealand and thus are subject to income tax, such as regular share trading.

In a speech delivered on 3 June 2009, New Zealand Treasury Secretary John Whitehead called for a capital gains tax to be included in reforms to New Zealand's taxation system, although there are no plans by the New Zealand Government to change the law as it stands.

Norway

The individual capital gains tax in Norway is 28%. In most cases, there is no capital gains tax on profits from sale of your principal home. There is no capital gains tax for share-based profits for companies in Norway (capital gains excluding gains from property, bonds, and interest). Personal investment companies are popular for this reason, as well as single purpose companies for property investments.

Pakistan

There is currently no capital gains tax in Pakistan. However, it is anticipated that the country will levy a tax in the upcoming fiscal year (2010-11).

The Philippines

There is 6% capital gains tax on the disposal of real estate in the Philippines. However, since the tax is imposed on the entire selling price or property valuation, whichever is lower, it is actually a transaction tax.

Poland

Since 2004 there is one flat tax rate (19%) on capital income. It includes: selling stocks, bonds, mutual funds shares and also interests from bank deposits.

Portugal

There is a capital gains tax on sale of home and property. Any capital gain (mais-valia) arising is taxable as income. For residents this is on a sliding scale from 12-40%. However, for residents the taxable gain is reduced by 50%. Proven costs that have increased the value during the last five years can be deducted. For non-residents, the capital gain is taxed at a uniform rate of 25%. The capital gain which arises on the sale of own homes or residences, which are the elected main residence of the taxpayer or his family, is tax free if the total profit on sale is reinvested in the acquisition of another home, own residence or building plot in Portugal.

In 1986 and 1987 Portuguese corporations changed their capital structure by increasing the weight of equity capital. This was particularly notorious on quoted companies. In these two years, the government set up a large number of tax incentives to promote equity capital and to encourage the quotation on the Lisbon Stock Exchange. Currently, for stock held for more than twelve months the capital gain is exempt. The capital gain of stock held for shorter periods of time is taxable on 10%.

Russia

There is no separate tax on capital gains; rather, gains or gross receipt from sale of assets are absorbed into income tax base. Taxation of individual and corporate taxpayers is distinctly different:

• Capital gains of individual taxpayers are tax free if the taxpayer owned the asset for at least three years. If not, gains on sales of real estate and securities are absorbed into their personal income tax base and taxed at 13% (residents) and 30% (non-residents). A tax resident is any individual residing in the Russian Federation for more than 183 days in the past year.
• Capital gains of resident corporate taxpayers operating under general tax framework are taxed as ordinary business profits at the common rate of 20%, regardless of the ownership period. Small businesses operating under simplified tax framework pay tax not on capital gains, but on gross receipts at 6% or 15%.
• Dividends that may be included into gains on disposal of securities are taxed at source at 9% (residents) and 15% (non-residents) for either corporate or individual taxpayers.

Singapore

There is no capital gains tax in Singapore.

South Africa

For legal persons in South Africa, 50% of their net profit will attract CGT and for natural persons 25%. This portion of the net gain will be taxed at their marginal tax rate. As an effective tax rate this means a maximum effective rate of 10% is payable and for corporate taxpayers a maximum of 15%. For example, for natural persons the maximum marginal tax rate is 40%. Assuming the aggregate capital gain for the year of assessment is R50 000, 25% of R50 000 is R12 500, which is taxed at 40%, therefore R5 000 is payable. The R5 000 as a percentage of the original profit made is 10%. In addition, it was proclaimed in 2009 by president elect, Jacob Zuma, that 3.5% of all capital gains should be included in the capital gains tax, hence raising the tax to 53.5% for juristic persons and to 28.5% for natural persons. Zuma said this money will be invested by the state into the "maintenance of government investments" such as the president's jet and Groote Schuur Estate in Rondebosch, Cape Town. Despite the many appeals by both local and international investors, the government has retained this policy as being "necessary for the maintenance of South Africa's most valuable assets".

South Korea

Capital gains tax in South Korea is 11% for tax residents for sales of shares in small- and medium-sized companies. Rates of 22% and 33% apply in certain other situations.[2]

Spain

Capital gains tax is a flat 18%.

From January 1, 2010 capital tax change in Spain. First EUR 6.000 will be taxed at 19%, on the other hand, gains from EUR 6.000 will be taxed at 21%

Sweden

The capital gains tax in Sweden is 30% on realized capital income.

Switzerland

There is no capital gains tax in Switzerland for residents. Corporate capital gains are taxed as ordinary income. Capital gains tax is charged to individuals on the sale property if sold within 10 years of purchase.

Thailand

There is no separate capital gains tax in Thailand. All earned income from capital gains is taxed the same as regular income.[3] However, if individual earns capital gain from security in the Stock Exchange of Thailand, it is exempted from personal income tax.

Turkey

Capital gains tax rate for residents and non-residents is 0% as of 2009 regardless of the holding period. http://rega.basbakanlik.gov.tr/#

United Kingdom

Basics (Tax year April 2009-10)

Individuals who are resident or ordinarily resident in the United Kingdom (and trustees of various trusts) are subject to a capital gains tax, charged at 18%.

There are exceptions for, for example, principal private residences, holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT.

Every individual has an annual capital gains tax allowance: gains below the allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation. All individuals are exempt from tax up to a specified amount of capital gains per year. For the 2009/10 tax year this "annual exemption" is £10,200.

Corporate notes

Companies are subject to corporation tax on their "chargeable gains" (the amounts of which are calculated along the lines of capital gains tax). Companies cannot claim taper relief, but can claim an indexation allowance to offset the effect of inflation. A corporate substantial shareholdings exemption was introduced on 1 April 2002 for holdings of 10% or more of the shares in another company (30% or more for shares held by a life assurance company's long-term insurance fund). This is effectively a form of UK participation exemption. Almost all of the corporation tax raised on chargeable gains is paid by life assurance companies taxed on the I minus E basis.

The rules governing the taxation of capital gains in the United Kingdom for individuals and companies are contained in the Taxation of Chargeable Gains Act 1992.

Background to changes to 18% rate

In the Chancellor's October 2007 Autumn Statement, draft proposals were announced that would change the applicable rates of CGT as of 6 April 2008. Under these proposals, an individual's annual exemption will continue but taper relief will cease and a single rate of capital gains tax at 18% will be applied to chargeable gains. This new single rate would replace the individual's marginal (Income Tax) rate of tax for CGT purposes. The changes were introduced, at least in part, because the UK government felt that private equity firms were making excessive profits by benefiting from overly generous taper relief on business assets. The changes were criticised by a number of groups including the Federation of Small Businesses, who claimed that the new rules would increase the CGT liability of small businesses and discourage entrepreneurship in the UK. At the time of the proposals there was concern that the changes would lead to a bulk selling of assets just before the start of the 2008-09 tax year to benefit from existing taper relief.

Historical (useful if looking at years prior to April 2008)

Individuals paid capital gains tax at their highest marginal rate of income tax (0%, 10%, 20% or 40% in the tax year 2007/8) but from 6 April 1998 were able to claim a taper relief which reduces the amount of a gain that is subject to capital gains tax (reducing the effective rate of tax), depending on whether the asset is a "business asset" or a "non-business asset" and the length of the period of ownership. Taper relief provided up to a 75% reduction (leaving 25% taxable) in taxable gains for business assets, and 40% (leaving 60% taxable), for non-business assets, for an individual. Taper relief replaces indexation allowance for individuals, which can still be claimed for assets held prior to 6 April 1998 from the date of purchase until that date, but was itself abolished on 5 April 2008.

United States of America

Main article: Capital gains tax in the United States

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains," which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets (See progressive tax). Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act signed into law by President Bush on May 17, 2006 (P.L. 109-222). In 2011 these reduced tax rates will "sunset," or revert to the rates in effect before 2003, which were generally 20%.

The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the structured sale (ensured installment sale), charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange. The United States is unlike other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion.

Deferring or reducing capital gains tax

Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. There are many such sales techniques and methods, each of which has its benefits and drawbacks. See some ways to defer and/or reduce capital gains tax below.

• (US Only) - Tax Loss Harvesting - Realized tax losses can carry forward forever and can be applied to offset capital gains months or years in the future. Discretionary Overlay managers have developed new trading methodologies that have evolved tax loss harvesting into a year-round strategy, as opposed to year-end, which is standard to most financial advisors, and is paramount in reducing the capital gains tax burden on affluent investors.
• Charitable trust - Defer and reduce capital gains by giving equity to a charity.
• Installment Sale - Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default.
• (US only) Deferred Sales Trust- Allows the seller of property to defer capital gains tax due at the time of sale over a period of time.
• (US only) 1031 exchange - Defer tax by exchanging for "like kind" property—however, generally available only for real estate and tangible property, both of which must be business-related. Pay capital gains when they are realized (i.e. when subsequently sold).
• (US only) Structured sale annuity (aka Ensured Installment Sale) - Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income.
• (US Only) Self Directed Installment Sale (SDIS)[4] Allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional installment sale
• (US only) (historical) Private annuity trust - No longer a valid tax deferral tool.

External links

• The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (1999), Brookings Institution Press.
• Deloitte Tax Country Guides
• Alan Reynolds, Capital Gains Tax: Analysis of Reform Options for Australia (1999), Australian Stock Exchange.
• IRS "Like Kind Exchanges Tax Tips"
• Tax Issues