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Contents 1 Capital Account 2 Capital gains 3 Capital Gains taxation 4 Country-wise treatment 4.1 Australia 4.2 Belgium 4.3 Canada 4.4 France 4.5 Germany 4.6 Hong Kong 4.7 Hungary 4.8 India 4.9 New Zealand 4.10 Poland 4.11 Singapore 4.12 Sweden 4.13 Switzerland 4.14 Thailand 4.15 United Kingdom 4.16 United States 5 Criticisms 6 Deferring and/or Reducing Capital Gains Tax

Capital Account

Capital Account shows the ownership/transactions and status of Capital Expenditure, Assets of the business etc.

It is also the account in which, the Initial Capital, required to start a business, is deposited by the entrepreneurs/proprietor or promoters of a business.

Capital gains

A capital gain is profit that results from the appreciation of a capital asset over its purchase price. If the price of the capital asset has declined instead of appreciated, this is called a capital loss. Capital gains occur in both real assets, such as property, as well as financial assets, such as stocks or Bond (finance)/bonds.

Capital gains can be either realized or unrealized. Realized capital gains occur when the actual sale of the asset returned more money than the purchase price. Unrealized capital gains occur when it is known that the asset has appreciated in value, but the asset has not been sold yet; the gain is only potential.

Capital Gains taxation

A capital gains tax (abbreviated: CGT) is a tax charged on Capital gains, the profit realized on the sale of an asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax.

Generally, appreciated capital assets that are sold after being held more than one year (long-term capital gain) will be taxed at a lower rate. Appreciated capital assets that are sold after being held less than one year (short-term capital gain) will be taxed as ordinary income, which is higher.

Country-wise treatment

Australia

Capital gains tax in Australia is only payable 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' (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 significant exemption is the family home. 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 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.

Belgium

There is no capital gains tax in Belgium.

Canada

50% of capital gains are taxed in Canada at the ordinary income rate. Currently there is no difference between long term and short term capital gains. Some exceptions apply, such as selling one's primary residence which may be exempt from taxation.

France

Capital gains tax is a flat 27%, however, in some specific situation tax can be reduced or eliminated (such as selling one's principal private residence).

Germany

There is currently no capital gains tax after a holding period of one year for shares or ten years for real estate. However, there are plans to introduce a capital gains tax of between 20% and 30% starting in 2008 or 2009.

Hong Kong

Hong Kong has no capital gains tax. This creates a loophole in the law whereby company directors can be paid a salary of Hong Kong dollar/HK$600,000 and the remainder in shares and stock options, thus falling into the lowest income tax bracket. As no tax is due on the capital gains, such individuals are able to avoid paying large amounts of tax which would otherwise have been due on their salaries, however corporation tax would be due on their company profits.

Hungary

Since 1st of September 2006 there is one flat tax rate (20%) on capital income. It includes: selling stocks, Bond (finance)/bonds, mutual funds shares and also interests from bank deposits.

India

Please refer to this article for Capital Gains Taxes in India

New Zealand

New Zealand does not have a capital gains tax in most cases. However, certain capital gains are classified as taxable income in New Zealand and thus are subject to income tax, such as regular share trading.[1]

Poland

Since 2004 there is one flat tax rate (19%) on capital income. It includes: selling stocks, Bond (finance)/bonds, mutual funds shares and also interests from bank deposit acount/deposits.

Singapore

There is no capital gains tax in Singapore.

Sweden

The capital gains tax in Sweden is 30% on realized capital income.

Switzerland

There is no capital gains tax in Switzerland.

Thailand

There is no separate capital gains tax in Thailand. All earned income from capital gains is taxed the same as regular income.[2] However, if individual earns capital gain from security in the Stock Exchange of Thailand, it is exempted from personal income tax.

United Kingdom

• Refer to Capital Gains Tax in the United Kingdom

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 for individuals is lower on "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 graduated tax/income tax brackets. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. In 2011 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. As a result:

In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets.

After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

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:

• An individual can exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. The two years of residency do not have to be continuous. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons. See IRS Publication 523.

• If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year. Any additional net capital loss can be "carried over" into the next year and again "netted out" against gains for that year. Corporations are permitted to "carry back" capital losses to off-set capital gains from prior years, thus earning a kind of retroactive refund of capital gains taxes.

The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the Structured sale (Ensured Installment Sale), 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 havens. 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.

In taxation in the United States, capital gains are subject to capital gains tax, but if a taxpayer has suffered from capital losses in the same year, he can offset the gains with the losses to reduce his taxable income. If the losses exceed the gains, then up to $3,000 may be deducted to offset ordinary income per year. Any capital loss exceeding the $3,000 per year limit may be "Carried Forward" to the next year and claimed as a capital loss on that years tax return etc. An individual can carry forward a large capital loss for up to 7 years claiming a $3,000 deduction each year.

Currently in the U.S., unrealized capital gains are not subject to income tax except in the case of zero coupon bonds.

Sale of principal residence: A capital gain on the sale of a principal residence is afforded special treatment for Federal income tax purposes. Married sellers of a principal residence may generally exclude up to $500,000 of gain ($250,000 of gain in the case of single individuals) from gross income, provided the real estate was used as the sellers' primary residence for at least two years during the five year period ending with the date of the sale.

• For further information on U.S. capital gains, go to Tax Topic 409 at the IRS: http://www.irs.gov/taxtopics/tc409.html

Criticisms

One argument is that the imposition of the capital gains tax as part of an income tax is a case of double taxation. Under this argument, gains subject to the tax are realized in the form of monies on which the taxpayer has already paid tax. Capital gains arise from positive appreciation of assets paid for with after-tax income. Because, in the United States, income subject to capital gains tax treatment is excluded from ordinary income taxation by, some argue that 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. One critique is that this additional future income is already subject to income tax and that the capital gain is already fully taxed.

No capital gains tax is imposed until the ownership of the capital (that will produce the future income) changes. That is, the tax does not apply until the capital gain is realized in a sale or other disposition.

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. One reason for increase in price of collectibles is inflation, decrease in purchasing power of money. Because inflation affects every purchase, paying tax out of nominal gains sometimes yields a net loss to the investor, giving government an economic incentive to create inflation.

Some critics argue that the capital gains tax is a regressive tax when its rate is lower than income tax (as is the case in higher tax brackets in the US). [3]

Deferring and/or Reducing Capital Gains Tax

Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. There are many sales techniques and methods out there, each of which have their benefits and drawbacks. See some ways to defer and/or reduce capital gains tax below.

• 1031 exchange - Defer tax by exchanging for "like kind" property. Pay capital gains when it is realized.
• Structured sale annuity (aka Ensured Installment Sale) - Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income.
• Private annuity trust - No longer a valid tax deferral tool.
• Charitable trust - Defer and reduce capital gains by giving equity to a charity.
• Installment Sale - Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default.