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Capital Gain, Capital Gains Taxes
Explaining Definitions, Meaning, Usage, and Capital Gains Taxes

 

Real estate assets that sell for more (or less) than their purchase price bring capital gains (or losses) for the owner. Most countries tax capital gains as income.

When an asset sells for more than its original cost, the owner realizes a capital gain.

What is a "Capital Gain?

A capital gain is a profit from selling an asset (e.g., stocks, bonds, or real estate, or even intangible assets such as goodwill), for more than the purchase price. A capital loss is a loss that results when selling an asset for less than the purchase price.

Most countries tax capital gains as income, for example, the United States, United Kingdom, and Canada, but not Switzerland or Singapore. In any case, country tac codes for capital gains differ significantly regarding exemptions for capital gains taxes, the impact of asset ownership time on tax liabilities, and other factors.

In cases where capital gains taxes are applicable, a capital loss can result in tax savings when used to offset other positive income or capital games.

Sections below further illustrate reporting conventions for capital gains, along with brief summaries of capital gains tax treatments in twenty countries.


 

Contents

Related Topics

  • For an explanation of the favorite "return on investment" metric in real estate investing, see the article "Cash On Cash."
  • The article "Return on Investment" explains and illustrates ROI and other "Investment View" financial metrics.
  • For more on different meanings of "Capital" in business, see the article "The Meaning of Capital."
 

Capital Gains on the Income Statement
Where Do Companies Report Capital Gains Taxes?

Companies report capital gains and their taxes at the end of every period on the Income statement. To conform with the "matching principle" in accounting, each period's "Income statement" pairs capital gains taxes along with the capital gains or losses that brought them.

In the income statement example in Exhibit 1 below, for instance, capital gains taxes (income taxes on gain) are taxes on a profit from an "Extraordinary item," sale of land, during the reporting period. For more on the several meanings of capital in business, finance, and economics, see Capital.

Grande Corporation                                   Figures in $1,000's
Income Statement for Year Ended 31 December 20YY   
Revenues
Gross sales revenues
  "Less" returns & allowances
      Net sales revenues
Cost of goods sold
   Direct materials
   Direct labor
   Manufacturing Overhead
      Indirect labor
      Depreciation, mfr equipment
      Other mfr overhead
      Net mfr overhead
         The Net cost of goods sold
Gross Profit








5,263
360
  4,000


33,329
    346


6,320
  6,100




 9,623



32,983








 22,043
 10,940
Operating Expenses
Selling expenses

   Sales salaries
   Warranty expenses
   Depreciation, Store equip
   Other selling expenses
          Total selling expenses
General & Admin expenses
   Administrative salaries
   Rent expenses
   Depreciation, computers
   Other general & admin expenses
      Total general & admin exp
           Total operating expenses
Operating Income Before Taxes
  

  4,200
  730
  120
   972


1,229
180
179
   200






6,022





  1,788













  7,810
  3,130
  Financial revenue & Expenses
  Revenue from investments
      Less interest expense
      Net financial gain (expense)
  Income before tax & ext items
  Less income tax on operations
    Income before extraordinary items
 



118
  511



  (393)
 2,737
  958
1,779
Extraordinary Items
   Sale of land
   Less initial cost
      Net gain on sale of land
      Less income tax on the gain
         Extraord items after tax
 
610
  145



465
  118





  347
Net Income (Profit)       2,126
 

Exhibit 2. Detailed example Income statement, showing how Revenue and Expense account items represent the Income statement equation:
    Income = Revenues – Expenses.

Which Countries Tax Capital Gains?
Capital Gains Taxes and Relevant Tax Code Sources for Twenty Countries

The Exhibit 1 table shows that capital gains tax requirements are sometimes complicated and that they differ significantly between countries.

For more specifics on tax consequences of capital gains or losses, consult your country's tax authorities.

Capital Gains Taxes By Country

 Australia

Capital gains tax in Australia is payable upon realized capital gains, but liability is subject to many exemptions and individual adjustments depending on the length of time the owner holds the asset, the year the owner acquires the asset, and the kind of asset. Gains from the sale of family homes, especially are subject to exemptions. For complete details consult the Australian Taxation Office at www.ato.gov.au.

  Canada

For individuals, Canada generally taxes capital gains at 50% of an individual's income tax rate. Capital gains for corporations, however, are taxed at the company's full tax rate. For complete details consult Revenue Canada at www.cra-arc.gc.ca.

  Denmark Denmark imposes capital gains taxes on gains from share dividends, interest income from bank deposits and bonds, and a few other kinds of benefits, although the tax rate varies greatly depending on the amount of gain, and whether the increase is realized by an individual or by a corporation. For complete details consult the Danish Ministry of Finance at www.fm.dk.
  France

France imposes capital gains taxes on individuals for gains on the sale of financial instruments such as stock shares or bonds, at a 30.1%, rate. There are special conditions, however (for example, holding funds in a PEA account), which reduces the tax rate. France generally does not impose capital gains tax on the sale of a principal residence, depending on the length of ownership. For complete details on capital gains taxes for individuals and corporations, consult French tax authorities at www.impots.gouv.fr.

  Germany

Germany imposes capital gains taxes on profits from selling financial instruments, such as stock shares or bonds, only if the purchase date was after 2008. Taxation on other capital gains depends on the length of time held. Germany does not impose a tax on profits from real estate sales if the owner owns the property for ten years or more. For complete details, consult the German Federal Ministry of Finance at German Federal Ministry of Finance at www.bundesfinanzministerium.de.

  India

Capital gains on the sale of equities are tax-exempt if the owner sells shares through recognized stock exchange and pays ST Tax on the deal, and if the holding period was one year or more. Gains from shorter-term ownership may be taxable. Tax requirements for sale of other capital investments, such as real estate, or bank deposits, may be taxed depending again on the period of ownership. For complete details, consult the Indian Department of Revenue at www.incometaxindia.gov.in.

  Ireland

The Republic of Ireland imposes a 25% tax on capital gains, but there are some exclusions and deductions. Exemptions include, for example, selling agricultural land, or a primary residence, or for transfers between spouses. The tax rate on certain kinds of investments, however, ranges from 23% to 40%. For complete details consult Irish Tax and Customers Revenue at www.revenue.ie/en.

  Israel

Israel imposes a flat 20% tax rate on capital gains.

  Italy

Italy imposes a capital gain tax of 27.5% on corporations and a capital gains tax of 12.55% on individuals, with specific exemptions and conditions. For complete details consult the Italian Ministry of Finance at www.finanze.it.

  Malaysia

Malaysia currently does not impose a capital gains tax for sale of equities, but it does require a 5% tax on profits from real estate sales if the owner holds the property for less than five years. For complete details consult the Inland Revenue Board of Malaysia at www.hasil.gov.my.

 Netherlands

With certain exceptions, there is no capital gains tax in the Netherlands. For complete details consult the Netherlands Ministry of Finance.

  New
  Zealand

New Zealand generally does not have a capital gains tax, per se, except that the country does tax a few classes of gains such as those from selling shares, as ordinary income. For complete details consult New Zealand Inland Revenue at www.ird.govt.nz.

  Norway

In Norway, individuals are taxed at a 28% rate for capital gains, although there are exemptions (e.g., from selling a principal home). Norway imposes taxes on companies for profits from selling shares or bonds, or for interest income. For complete details consult the Norwegian Ministry of Finance at www.skatteetaten.no.

  Singapore

Singapore does not generally impose a capital gains tax. For more details consult the Inland Revenue Authority of Singapore at www.iras.gov.sg.

  Sweden

Sweden imposes a 30% tax on capital income. For complete details consult the Swedish Tax Agency at www.skatteverket.se.

  Switzerland

Swiss residents pay no capital gains tax, except in some cases for a capital gains tax on property sales, depending on how long the owner holds property, and also depending on which canton the transaction occurs in. Corporations pay the same tax on capital gains as on ordinary income. For complete details consult the Swiss Federal Department of Finance at www.efd.admin.ch.

  United
  Kingdom

Individuals and corporations in the UK are liable for capital gains taxes, under a complex rate system, which takes into account such factors as the nature of asset or property sold (e.g., stock shares or private residence), the taxpayer's basic tax rate, year of asset acquisition, and many other factors. For complete coverage consult the UK Department of Inland Revenue a twww.hmrc.gov.uk. Search for "capital gain."

  United
  States

In the United States, individuals and corporations are generally taxed for capital gains at the same rate as for ordinary income, except that individuals may receive a reduced tax rate if the owner holds the property for more than one year. For complete details, consult the US Internal Revenue Service at www.irs.gov, and especially IRS publication 550, Investment Income and Expenses, at  www.irs.gov/publications/p550/index.html.

For more specifics on tax consequences of capital gains or losses, consult your country's tax authorities.