Capital gains tax

A capital gains tax is the tax on profits realised on the sale of a non-inventory asset. The most common capital gains are realised 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 compared to corporations. Countries that do not impose a capital gains tax include Bahrain, Barbados, Belize, the Cayman Islands, the Isle of Man, Jamaica, New Zealand, Sri Lanka, Singapore, and others. In some countries, such as New Zealand and Singapore, professional traders and those who trade frequently are taxed on such profits as a business income.
Capital gains taxes are payable on most valuable items or assets sold at a profit. Antiques, shares, precious metals and second homes could be all subject to the tax if the profit is large enough. This lower boundary of profit is set by the government, and if the profit is lower than this limit it is tax-free. The profit is in most cases the difference between the amount an asset is sold for and the amount it was bought for.
The tax rate on capital gains may depend on the seller's income. If any property or asset is sold at a loss, it is possible to offset it against annual gains. For equities, national and state legislation often has a large array of fiscal obligations that must be respected regarding capital gains.

As an obstacle to sale

The CGT can be considered a cost of selling which can be greater than, for example, transaction costs or provisions. The literature provides information that barriers for trading negatively affects the investors' willingness to trade, which in turn can change asset prices.
Companies with tax-sensitive customers are particularly reactive to capital gains tax and its change. CGT and changes to it affect trading and the stock market. Investors must be ready to react sensibly to these changes, taking into account the cumulative capital gains of their customers. They are sales must be delayed due to an unfavorable market conditions caused by capital gains tax. A study by Li Jin showed that great capital gains discourage selling. On the contrary to this fact, small capital gains stimulate the trade and investors are more likely to sell. "It is easy to show that to be willing to sell now the investor must believe that the stock price will go down permanently. Thus, a capital gains tax can create a potentially large barrier to selling. Of course, the foregoing calculation ignores the possibility that there might be another tax-timing option: Given capital gains tax rates fluctuate over time, it might be worthwhile to time the realization of capital gains and wait until a subsequent regime lowers the capital gains tax rate."

Locked-in effect

Because capital gains are taxed only upon realization, an individual who owns a security that has increased in value may be less likely to sell it. The seller knows that when sold, tax is levied on the positive difference of the price at which the security was bought and the price at sale. If the seller chooses not to sell, the tax is postponed to later date. Postponing allows more time for the security to grow in value and generate returns. If the seller delays the sale, though the absolute value of the tax is greater than if they had not delayed, the present discounted value of the tax is reduced; thus allowing the security to grow undoes the tax. Therefore, the seller has an incentive to hold the securities longer than they would have without capital gains tax. This distortion has been called the locked-in effect or lock-in effect.
Martin Feldstein, former chairman of the Council of Economic Advisers under President Reagan has claimed that the effect is so large that reducing the capital gains tax would lead individuals to sell securities that they previously had refused to sell, to such an extent that government revenues would actually increase. 1994 estimates suggest that a permanent reduction in the capital gains tax rate would have little effect.

Administrative expenses

With collecting of any type of tax come administrative costs associated with collecting, administering and managing the collection of capital gains taxes. These costs are directly incurred by governments that collect taxes, and ultimately its citizens. Unfortunately, no studies specifically analyze the costs associated with capital gains taxes.
Canadian researcher Francois Vailancourt in 1989 examines the administrative costs associated with personal income taxes and two payroll taxes. The costs include processing costs, administration and accommodation costs, capital expenses, and litigation costs. These costs represented roughly 1% of the gross revenues collected by these three tax sources. The paper does not show exactly what costs are incurred by capital gains tax.

Compliance costs

Tax compliance costs are incurred when fulfilling the recording and filing requirements associated with paying a tax. These costs include such expenses as bookkeeping, reporting, calculating, and remitting tax payments. A study from 1992, which may be outdated due to technological advancements, found that American taxpayers who received capital gains income incurred higher compliance costs than those who did not. From a survey of 2,000 Minnesota households, the authors found that having capital gains increased the time individuals spent on paying taxes by 7.9 hours, increased the money they spent on professional tax assistance by about $21, and increased the total cost of compliance by $143 per taxpayer per year.
Altogether the study concludes that very few studies measure compliance costs associated with capital gains tax, but those few that do clearly indicate that compliance costs are not insignificant. Therefore, the costs must be taken into consideration when assessing tax policy.

Tax avoidance or deferrence

Taxpayers may defer capital gains taxes by simply deferring the sale of the asset. Depending on the specifics of national tax law, taxpayers may be able to legally reduce, or avoid capital gains taxes using the following strategies:

A nation may tax at a lower rate the gains on investments in favored industries or sectors, such as small business.
Tax can be reduced when property ownership is transferred to family members in the low-income bracket. In the U.S., if in the year of selling the property a taxpayer's family member falls within the 10% to 12% ordinary income tax bracket, they could avoid the capital gains tax entirely.
There may be accounts with tax-favored status. The most advantageous of these let gains accumulate in the account without taxes; however, taxes may be owed when the taxpayer withdraws funds from the account.
Selling an asset at a loss may create a "tax loss" that can be applied to offset gains realized in the future, and avoid or reduce taxes on those gains. Tax losses are a business asset, but the business must avoid "sham" transactions, such as selling to oneself or a subsidiary for no legitimate purpose other than to create a tax loss.
Tax may be waived if the asset is given to a charity.
Tax may be deferred if the taxpayer sells the asset but receives payment from the buyer over a period of years. However, the taxpayer bears the risk of a default by the buyer during that period. A structured sale or purchase of an annuity may be ways to defer taxes.
In certain transactions, the basis of the asset is changed. In the U.S., the basis for an inherited asset becomes its value at the time of the inheritance.
Tax may be deferred if the seller of an asset puts the funds into the purchase of a "like-kind" asset. In the U.S., this is called a 1031 exchange and is now generally available only for business-related real estate and tangible property.
Tax may be deferred if the capital gain income is reinvested into certain geographic areas. In the U.S., the Opportunity Zone program was created to "recycle capital into the economy that would otherwise be 'frozen' in place due to investors' reluctance to trigger capital gains taxes" and "bring investment and development to lower income areas that do not otherwise receive a great deal of attention".
Tax evasion

Capital gains taxes have also led some taxpayers to illegally evade the payment of the tax. The level of tax evasion is the extent to which actual tax revenue collected by government differs from that which would have been collected if every taxpayer paid exactly what is required by law. Tax evasion has important implications for the efficiency of taxes, since resources spent on evading the tax could be put to more productive uses.
Professor James Poterba's work from 1987 in the American Economic Review studied the relationship between capital gains taxes and tax evasion: a 1% decrease in capital gains tax rate increases the reported tax base by 0.4%.
A more recent study from the Journal of Public Economics provides support for Poterba's work with evidence from a unique data set of shareholder information from the 1989 leveraged buyout of RJR Nabisco. The study estimates that a one percentage-point increase in the marginal tax rate on capital gains is associated with a 0.42% increase in evasion. In addition, the authors find that the average level of evasion was 11% of the total capital gains.

By country

Albania

In Albania, capital gains on the sale of stocks or shares are taxable at 15%. This tax rate also applies to capital gains made from transfers of ownership of real estate, both land or buildings. Individual income tax rate on dividends is 8%.

Argentina

There is no specific capital gains tax in Argentina; however, there is a 9% to 35% tax for fiscal residents on their world revenues, including capital gains.

Australia

collects capital gains tax only 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" are the capital gain. Discounts and other concessions apply to certain taxpayers in varying circumstances. Capital gains tax is collected from assets anywhere in the world, not only in Australia.
Capital gains tax is the levy applied to profits from selling assets. Despite its designation as "capital gains tax", it is not a standalone tax but rather a constituent part of Australia's income tax. When assets are sold, a CGT event is triggered, and capital gains and losses must be disclosed in the income tax return.
From 21 September 1999, after a report by Alan Reynolds, the 50% capital gains tax discount has been in place for individuals and for some trusts that acquired the asset after that time and that 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 principal family home when not used for business purposes such as rental income or home-based business activity. 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 unused as a personal residence 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.