What is Capital Gains Tax (CGT)?
What is Capital Gains Tax?
Capital Gains Tax or CGT is a tax that is paid when you sell an investment or asset for more than it cost.
For example, you may be liable for capital gains tax if you sell shares, property, a banana ice cream business, Bitcoin or a contract for more than it cost to buy.
Is it the same as income tax?
Capital gains tax is different from income tax but they are both paid in your yearly tax return
You got an example for me?
For example, Georgia buys a parcel of shares in a bank for $1000 and sells them for $1,500 just 6 months later. That's a capital gain of $500 ($1,500 - $1,000). Georgia also receives dividend income of $100.
Georgia will pay taxes on $600 in total. That is, she will pay taxes on both the dividend income ($100) and the increase in the value of her shares ($500).
If her tax rate is 20%, Georgia will pay $120 in tax for her investment (20% x $600).
What if I owned the investment for more than a year?
Individuals can receive a capital gains tax discount for owning an investment for more than a year. For example, Georgia would pay tax on only half of the capital gain, or $250, if she owned the bank shares for more than one year.
Do I pay capital gains tax on my home?
For some assets, you won't be liable to pay capital gains tax. For example, gains made on the family home or a car that was used for personal reasons only.
And if I work from home or drive for Uber?
However, if you use your house as a home office or workshop, or use your car to make money (e.g. Uber), you will be liable for some capital gains tax when you sell. Check with your accountant if you're worried about paying a large tax bill.
Test Your Knowledge
Philip makes a $100,000 profit on an investment property that he bought six months ago. What is Philip's capital gain for tax purposes?
Philip's capital gain for tax reasons is $100,000 because he held the investment property for less than a year.
If Philip made $100,000 in capital gains and has a tax rate of 20%, how much capital gains tax will he pay for his investment?
Philip will pay $20,000 in capital gains tax. That is, $100,000 (the capital gain) x 20% (his tax rate) = $20,000.
If Philip holds an investment for more than 1 year, is he likely to pay less tax?
If Philip owned his investment property for more than one year his capital gain for tax purposes would be $50,000 -- not $100,000. Meaning, he would pay less tax.
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