Capital gains tax

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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 an 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.

1 Australia
2 Belgium
3 Germany
4 Hong Kong
5 India
6 New Zealand
7 Sweden
8 Switzerland
9 Thailand
10 United Kingdom
11 United States
12 Criticisms
13 External links

[edit] 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 add-ons over time) are the capital gain. Discounts and other concessions apply to certain taxpayers in varying circumstances. From the 21st of September 1999, the 50% capital gains tax discount has been in place for individuals and some trusts that acquired the asset after that time. The amount left after applying the discount is added to the assessable income of the taxpayer for that financial year.

For individuals, the most signficant 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 your personal residence (for example, being leased to other tenants).

In 1999 following a report by Alan Reynolds the Australian government significantly cut the capital gains tax rate.

[edit] Belgium

There is no capital gains tax in Belgium.

[edit] Germany

There is currently no capital gains tax after a holding period of one year for shares or ten years for real estate. However there are plans to introduce a capital gains tax of between 20% and 30% starting in 2008 or 2009.

[edit] Hong Kong

Hong Kong has no capital gains tax. This creates a loophole in the law whereby company directors can be paid a salary of HK$600,000 and the remainder in shares and stock options, thus falling into the lowest income tax bracket. As no tax is due on the capital gains, such individuals are able to avoid paying large amounts of tax which would otherwise have been due on their salaries, however corporation tax would be due on their company profits.^{[citation needed]}

[edit] India

There is currently no capital gains tax after a holding period of more than one year for equities.

[edit] 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. [1]

[edit] Sweden

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

[edit] Switzerland

There is no capital gains tax in Switzerland.

[edit] Thailand

There is no separate capital gains tax in Thailand. All earned income from capital gains is taxed the same as regular income. [2]

[edit] United Kingdom

All individuals are exempt from CGT up to a specified amount of capital gains per year. For the 2006/7 tax year this "personal exemption" is £8,800.

Individuals who are resident or ordinarily resident in the United Kingdom (and trustees of various trusts) are subject to a capital gains tax, with exceptions for, for example, principal private residences, holdings in ISAs or gilts. 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. Individuals pay capital gains tax at their highest marginal rate of income tax (0%, 10%, 20% or 40% in the tax year 2004/5) but since 6 April 1998 have been 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 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.

A taxpayer is exempt from CGT on his/her principal private residence. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. The sale of a family business can be exempt from CGT upon retirement.

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.

[edit] 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. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. In 2011 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

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 Reconciliation Act signed into law by President Bush on May 17, 2006. As a result:

In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets.

After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

Technically, a "cost basis" is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.

Exemptions from capital gains taxes (CGT) in the United States include:

An individual can exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. The two years of residency do not have to be continuous. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons. See IRS Publication 523.

If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year. Any additional net capital loss can be "carried over" into the next year and again "netted out" against gains for that year. Corporations are permitted to "carry back" capital losses to off-set capital gains from prior years, thus earning a kind of retroactive refund of capital gains taxes.

The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the 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.

[edit] Criticisms

It is sometimes claimed that capital gains tax in conjunction with income tax is a case of double taxation. It is notable that your gains subject to CGT are from monies that you already paid income tax on; capital gains arise from positive appreciation of assets paid for with after-tax income. Some might think that just because, in the United States, income subject to capital gains tax treatment is excluded from ordinary income taxation by 26 USC § 1(h) [3], and so it is legally impossible to doubly tax capital gains under that law.

Broadly speaking, the value of capital relates to the future income that the capital is expected to produce. Any increase in the value of capital hence relates to an expected increase in future income. However this additional future income is already subject to income tax so the capital gain is already fully taxed.

This argument is somewhat acknowledged by the fact that no CGT applies if ownership of the capital (that will produce the future income) does not change hands. In other words CGT does not apply if the capital gain is not realized through a sale.

There are some weaknesses in the double taxation argument. Specifically many items that are subject to Capital Gains Tax are not expected to produce any future income. Things such as works of art and precious artifacts increase in value for reasons other than associated future income.