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In many jurisdictions, including the United States and the United Kingdom , a capital gains tax or '''CGT''' is charged on Capital Gain s, that is the profit realised on the sale of an asset that was previously purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. AUSTRALIA See Also: Capital gains tax in Australia Capital gains tax in Australia is only payable upon realised capital gains, except for certain provisions relating to deferred- Interest Debt such as Zero Coupon Bond s. 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 realised 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. NEW ZEALAND New Zealand does not have a capital gains tax. However, certain things which would be classified as capital gains elsewhere are classified as taxable income in New Zealand and thus are subject to income tax. {Link without Title} SWEDEN The capital gains tax in Sweden is 30% on realized capital income. SWITZERLAND There is no capital gains tax in Switzerland . UNITED KINGDOM All individuals are not subject to CGT for a certain amount of capital gains. 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 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. 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 shareholding 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 . 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 is lower for "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 2013 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%. 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:
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 Haven s. 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 . CRITICISMS It is sometimes claimed that ''capital gains tax'' in conjunction with Income Tax is a case of double taxation. In the United States, income subject to capital gains tax treatment is excluded from ordinary income taxation by 26 USC § 1(h) {Link without Title} , 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 realised 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. EXTERNAL LINKS
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