Investing terms: Capital Gains

Invest in a vacation home or buy into a timeshare?
September 13, 2019
Are sin stocks really sinful?
November 20, 2019

Investing terms: Capital Gains

Taxes, for most of us, are an inevitability. But how much tax you pay may differ depending on where your earning or profits come from. In many countries, taxes on capital gains can dampen investment appetites.

What are capital gains?

Capital gains measure the increased value of assets such as securities or real estate. You buy $100 in stocks that are then worth $150 in a year – you’ve made a $50 capital gain. Pretty simple, yes? Well, if you decide to sell that stock for that $50, you may have to pay a capital gains tax on it. This is where things start getting complicated.

Most countries get their revenue through taxes, mainly income taxes on your salary. You would think that since you bought the stock with money you took home after taxes, that $50 should be yours free and clear, you may be wrong. Some countries, such as Australia and Italy, treat capital gains as income and tax it as such, while others, such as Singapore and the UAE, do not tax capital gains at all.  Some like Malaysia and Thailand have a territorial taxation system and overseas capital gains are non taxable.

Why is a capital gains tax so contentious?

“Many people think capital gains are rightly earned from money already taxed so shouldn’t be taxed again,” explains Richard Cayne of Meyer International. “Unfortunately, many governments don’t agree with this and consider capital gains taxable income or outright taxable wealth.”

Normally, capital gains, if taxed at all, is only considered taxable if realised (you sell). Unfortunately, a capital loss (that $100 in stock is now worth $75 for a $25 loss) is often not considered at all, which can add to frustration, although some countries (e.g. Japan and the Netherlands) will allow a deduction.

While many people consider capital gains tax a tax on the wealthy, it does have repercussions on everyone’s portfolio. Capital gains tax regimes may deter investment into certain industries or countries. Companies subject to capital gains tax may make corporate decisions differently which may affect overall performance. This can have wide-reaching impacts.

What are the best strategies to mitigate capital gains tax?

There many different strategies to reduce or even avoid capital gains tax. Depending on your tax jurisdiction(s), you can invest in certified retirement funds or park your money offshore. Yes, if you are an expat or invest internationally, you may have more than one tax jurisdiction. Even if you live, work, and invest in one country, you should talk to a trusted advisor to ensure that your tax liabilities are reduced down as low as possible, as allowed by law. You do not want the fear of paying too much in tax because you to rush into a risky scheme that may cost you more than just paying capital gains tax.

Comments are closed.