Capital Gains Tax – a study among the nations

Capital gains tax has all of a sudden sprouted from no where and lots of discussions started taking place. The current budget which was recently presented in the parliament invited the serious attentions of investors not only from India but around the globe. It is almost impossible to find any one who did not buy the shares, houses, machineries etc or sold them at points of need. Let us learn the meaning of capital gains tax from the oldest tax regimes of the world, my favourite, United States of America, having tax structure for nearly 163 years. Let me take you to US Taxation rules. This article provides a comprehensive overview of capital gains tax across different nations, highlighting their unique tax structures and recent changes.

What is capital gains tax?

Quoting from IRS website, (USA)

“Almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset’s basis is its cost to the owner, you have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren’t tax deductible.

To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. 

To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year.

The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The term “net short-term capital loss” means the excess of short-term capital losses (including any unused short-term capital losses carried over from previous years) over short-term capital gains.”

Let me explain to you in simple terms that as asset held for 1 year or less, you are holding short-term or anything longer than this is a long term.

This story from the United Kingdom, the other older country once with even window tax can explain further juicier story.

Story of capital gains tax over the decades

• 1965-1979 – The first comprehensive CGT was introduced following a large increase in property and other asset values from the end of World War II.

• 1880-1997- Later, in 1980, the rate became a universal 30% under Conservative Chancellor Sir Geoffrey Howe. But in 1982 an ‘indexation allowance’ was introduced, which represented the difference between the cost of the holding and the increase in the Retail Prices Index measure of inflation – the idea being that people were only taxed on gains above the rate of inflation. (Please do not blame me if indexation of property is part of Indian CGT till the current budget with revised CGT of 12.5% is passed)

1998 -2007

• In 1998, Labour Chancellor Gordon Brown replaced indexation with taper relief, which reduced the tax payable on assets owned for longer periods but removed the link with inflation.

2008 -2019

• Taper relief was abolished in 2008 with a lower CGT of 18% which got increased to 10%, 20%, and 28% depending upon the income level of taxpayers.

2020 – Till date

• Throughout the various evolutions of CGT, the allowance – the CGT-free portion – of gains gradually increased to £12,300 in tax year 2020/21, before being cut in 2023/24 to 6,000 and again to £3,000 in the current 2023/24 tax year.

What about the CGT in developed countries? Or others whom I loved to look at?

Canada – (Last reviewed June 2024) Half of a capital gain (proposed to increase to two thirds for dispositions after 24 June 2024) constitutes a taxable capital gain, which is included in the corporation’s income and taxed at ordinary rates.

What about individuals?

Half of a capital gain (proposed to increase to two thirds for the portion of capital gains realised by individuals after 24 June 2024 that exceeds an annual CAD 250,000 threshold) constitutes a taxable capital gain, which is included in the individual’s income and taxed at ordinary rates.

Belgium

(Last reviewed 12 March 2024)

For corporates – Capital gains are subject to the normal CIT rate (except capital gains on shares under certain conditions).

For individuals – In general, exempted (except in some specific cases)

Germany

(Last reviewed 27 June 2024)

Capital gains are subject to the normal corporation tax rate.

For individuals

25, plus 5.5% solidarity surcharge on tax paid (in total 26.375% plus church tax if applicable)

France

Last reviewed March 2024.

Corporates – Capital gains are subject to the normal CIT rate

Individuals – 30, plus exceptional income tax for high earners at 4%.

China (People’s republic) Last reviewed June 2024

Corporates – Capital gains are subject to the normal CIT rate.

Individuals – 20%

Japan

(Last reviewed 09 July 2024)

Corporates – Capital gains are subject to the normal CIT rate

Individuals – Gains arising from sale of stock are taxed at a total rate of 20.315% (15.315% for national tax purposes and 5% local tax).
Gains arising from sale real property are taxed at a total rate of up to 39.63% (30.63% for national tax purposes and 9% local tax) depending on various factors.

Italy – (Last reviewed 12 July 2024)

Corporates

Capital gains are subject to the normal CIT rate. For financial investments, the PEX regime at 95% exemption may be applied, provided that the conditions set by the law are met.

Individuals

Capital gains are subject to separate taxation at 26% (normal PIT rate applies in certain instances).

Jamaica

Corporates

No capital gain tax regime. Transfer tax at 2% on transfers of Jamaican real estate and securities.

Individuals

No capital gain tax regime. Transfer tax at 2% on transfers of Jamaican real estate and securities.

Jordan

20% for corporates and 30% for individuals

Malaysia

For both corporates and individuals

Generally, gains on capital assets are not subject to tax, except for gains arising from the disposal of real property situated in Malaysia, which is subject to RPGT (up to 30%).

Mexico

Corporates

30% for a Mexican resident, accrued as regular taxable income.
25% on the gross proceeds, or 35% on the net gain, for non-residents. You can refer to their IT web site for individual CGT.

New Zealand

New Zealand does not have a comprehensive capital gains tax. However, capital gains derived by a company will generally be taxed as dividends on distribution to shareholders, subject to certain exceptions.

No CGT for individuals. CIT – Corporate Income Tax. PIT – Personal income tax rate

Switzerland

The effective tax rate (ETR) depends on the company’s location of corporate residency in Switzerland. The ETR of a company resident at the capital cities of the Swiss cantons varies between 11.9% and 21.0%. Exceptions to be considered relate to the participation relief and capital gains on real estate.

For individuals: Movable assets: Exempt.
non-movable assets: Exempt for federal tax, and cantonal tax rate varies per canton

Lots of CGT rates country wise (%).

A study of nearly 150 countries indicates that two thirds have the CGT for corporates as the same corporate income tax.

In 34 countries the CGT is the same as normal personal income tax.

Who are those countries with no capital gains tax?

Cayman Islands, Singapore, Saint Lucia, Bahrain, Bermuda, Barbados, Namibia, Hongkong, Channel Islands, Gibraltar, Eswatini.

Let me give some information about Indian CGT at present and what would be after the budget is passed.

Indian capital gains tax (currently)

For corporates

10%/20% (applicable surcharge and cess) long-term and 15%/40% (applicable surcharge and cess) short-term (may be exempt under Double Taxation Avoidance Agreement).

Please refer to Capital gains in the Income determination section for more details.

For individuals

Long-term capital gain: 10% (on sale of equity shares/ units of equity- oriented funds/units of business trust in excess of INR 100,000 and security transaction tax is paid). 10% for non-residents without cost inflation adjustment or 20 for residents/ non-residents with cost inflation adjustment (on sale of any other asset).

Short-term capital gain: 15% (if securities transaction tax paid on sale of equity shares/ units of equity- oriented funds/ units of business trust) or normal slab rates (on sale of any other asset).

What are the proposals contained in the budget on CGT

Conclusion

During a discussion with one of my senior relatives who is long term player in share market, this issue of the proposed CGT in India came for discussion and this had resulted in above article. Yes, the picture is clearer with vast comparison. You may arrive at your own conclusion whether the glass is half full or more filling is required.

Reference

PWC publishes vast information on taxes. Also, the information from world population review. Any mis- information is my fault. But one can appreciate that my article is informational in nature and not to be relied upon for legal/tax purposes.