Capital gains tax

Federal Capital Gains Tax Collections 1954-2009 history chart

Capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset that was greater in value than the purchase price. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property. Not all countries impose a capital gains tax and most have different rates of taxation for individuals and corporations.

Overview

Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. This means that the asset's increase in value is not taxed until the investor sells it. The specific rules regarding what constitutes a taxable event for capital gains tax purposes vary by jurisdiction. Generally, these taxes are calculated on the net gain from the sale, which is the selling price minus the purchase price (also known as the basis).

Types of Capital Gains

Capital gains can be classified into short-term and long-term gains. Short-term capital gains are typically taxed at a higher rate than long-term capital gains. The distinction between short-term and long-term capital gains is based on the duration the asset was held before being sold. For example, in the United States, assets held for more than one year are considered long-term and are subject to lower tax rates.

Short-Term Capital Gains

Short-term capital gains are gains on assets held for one year or less. These gains are usually taxed at the individual's ordinary income tax rate.

Long-Term Capital Gains

Long-term capital gains are gains on assets held for more than one year. The tax rate for long-term gains is lower than the rate for short-term gains, encouraging long-term investment.

Exemptions and Deductions

Some jurisdictions offer exemptions or deductions from capital gains tax. For example, in some countries, the sale of a primary residence may be exempt from capital gains tax under certain conditions. Additionally, losses on capital investments can often be used to offset gains, reducing the taxable amount.

International Aspects

The approach to capital gains tax varies significantly around the world. Some countries, like Belgium, have no capital gains tax on the sale of personal investments. Others, like the United States, have a more complex system with different rates for short-term and long-term gains. Tax treaties between countries can also affect how capital gains are taxed, especially for non-residents.

Criticism and Support

Critics of capital gains tax argue that it discourages investment and economic growth by taxing investments more heavily than other types of income. Supporters contend that capital gains tax is a necessary tool for income redistribution and reducing wealth inequality.

Conclusion

Capital gains tax is a complex and varied aspect of the global tax landscape. Its impact on investment strategies and economic growth continues to be a topic of debate among economists, policymakers, and investors.