Capital Gains Tax

Capital gains tax (CGT) is a tax on the profit realized when someone sells or otherwise disposes of an asset for more than they paid for it. Assets typically covered include shares, bonds, investment funds, second homes, land, business interests and, in many countries, crypto-assets. The tax is paid by individuals, trusts and, in some systems, companies.

The tax falls on the capital gain itself, not on the full sale price, and usually only when the gain is "realized" through a sale, gift or exchange. Some countries run it as a separate tax with its own rates, as the UK does; others, like the United States, fold it into the income tax with special rates. It is closely linked to inheritance tax, because many systems wipe out unrealized gains when an owner dies.

Imagine buying a painting for a modest sum and selling it years later for much more. The government does not tax the painting while it hangs on the wall, even if its value climbs. It waits until the sale, then takes a share of the difference between what was paid and what was received.

If the painting sells for less than it cost, there is no tax, and the loss can often be used to reduce tax on other gains. Many countries also let people make a small amount of gain each year tax-free, and they treat the family home more gently than investments.

The basic calculation is:

• $\text{Sale proceeds}$ is the price received for the asset.
• $\text{Selling costs}$ are fees such as broker commissions or legal costs on the sale.
• $\text{Cost basis}$ is the purchase price plus buying costs and the cost of improvements.

For example, an investor buys shares for $10,000, pays $50 in fees and sells them three years later for $16,000, paying another $50. The gain is $16{,}000 - 50 - 10{,}050 = 5{,}900$. At a 15% rate, the tax is $885.

A capital loss arises when the result is negative. Most systems let losses offset gains in the same year and carry unused losses forward. Some countries reduce the gain for inflation through indexation of the cost basis, so that only the real increase is taxed. India allowed indexation on many long-term assets until changes in 2024 largely removed it in exchange for a lower rate.

CGT design varies widely. Examples as of 2026:

• United States. A short-term capital gain on assets held a year or less is taxed as ordinary income. A long-term capital gain is taxed at 0%, 15% or 20%, depending on income, and higher earners may owe an extra 3.8% net investment income tax. Assets inherited at death receive a "stepped-up" basis, so gains during the deceased owner's life are never taxed.
• United Kingdom. Since 30 October 2024 the main rates are 18% for gains within the basic-rate band and 24% above it. The annual exempt amount is £3,000. A person's main home is usually exempt under private residence relief.
• India. Gains on listed shares held more than a year are taxed at 12.5% above an annual threshold, and short-term gains on listed shares at 20%, following changes in the 2024 budget.
• No-CGT jurisdictions. Countries such as the United Arab Emirates and several tax havens charge no personal capital gains tax, which attracts mobile investors.

Investment funds add another layer. A mutual fund that sells holdings at a profit passes the gain to its investors as a capital gains distribution, which is taxable even if the investor reinvests it.

Because the tax applies only on sale, investors can postpone it indefinitely by holding on to winning assets. Economists call this the lock-in effect: people may keep assets they would otherwise sell, reducing the flow of capital to its best use. Lower rates on long-held assets are partly meant to ease this, and partly to reward saving and investment.

The timing of sales also responds strongly to announced rate changes. Revenue often surges before a rate rise as investors sell early, which makes CGT receipts volatile. Because gains are concentrated among wealthy households, the tax also plays a large part in debates about economic inequality and the progressivity of the tax system as a whole.

Supporters of lower rates argue that gains are often taxed twice, first as company profits and then when shares rise in value, and that part of any nominal gain is just inflation. They also argue that high rates reduce entrepreneurship and risk-taking. Some cite supply-side economics and the Laffer curve to argue that cutting rates can even raise revenue in the short run by unlocking sales.

Supporters of higher rates point out that preferential treatment lets people whose income comes mainly from assets pay lower average rates than salaried workers, and that it encourages tax avoidance by relabelling income as gains, as with private equity carried interest. Others propose taxing gains as they accrue each year, or at death, rather than only on sale; critics reply that this would force people to sell assets to pay tax on paper profits, the same objection raised against a wealth tax.

• IRS Topic No. 409: Capital gains and losses
• GOV.UK: Capital Gains Tax