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Contrary to popular opinion, capital gains tax regulations can have a significant effect on the broader health of the economy, from regulating asset trading activity to potentially stimulating increased growth and investment inflows.
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Unfortunately, despite the importance of capital gains tax code, the rules surrounding capital asset valuation and declaration are frequently muddled, if not outright contradictory. Similar confusion reigns in the debate over lowering capital gains tax, with one side contending that it’ll improve economic growth and the other side arguing that it will magnify regressive tax outcomes.
In this article, we’ll be examining several different approaches to capital gains tax policy, including the polarizing role of capital tax gains in Canada and the United States. Before diving into these issues, however, we thought it would be a good idea to include a general refresher on capital gains taxation.
What Is Capital Gains Tax?
Put simply, capital gains tax is a tax upon the profit realized from selling an asset. As the name suggests, this tax only applies to the positive difference between the sale price and purchase price of the asset in question. Like other taxes, capital gains taxation may vary depending on your official residency status.
For an asset to be subject to capital gains tax, it must be classified as a capital asset. The most commonly traded capital assets are stocks, bonds, real estate, cryptocurrencies, precious metals, and eligible collectables. Fortunately, tax agencies take care to restrict capital gains tax to capital assets that are used for investment purposes. Some of the most common exemptions to capital gains taxation are primary residences, personal vehicles, and depreciating commercial assets.
Capital Gains Tax Around the World
Rates and regulations for capital gains tax can vary significantly depending on your tax residency. To give you an idea of how much variation there is in capital gains tax systems, we’ve broken down the capital gains tax policies for five different countries around the world.
1. Denmark
The first entry on our list, Denmark is famous for its progressive political system and well-funded public sector. Perhaps unsurprisingly given its progressive approach to taxation, Denmark’s capital gains tax comes in at an eye-watering 42 percent marginal rate.
2. Australia
Australia’s tax agency doesn’t set a specific rate for capital gains tax events. Instead, capital gains are added onto your assessable income for the financial year in which you realized your capital profits. Once your income tax is reported, capital gains are taxed according to your adjusted marginal income tax bracket.
3. United States
The capital gains tax rate in the United States is moderated by the length of time a person has held possession of a specific asset. If you have owned an asset for a year or less, the capital gains tax rate on that asset is automatically set to your marginal tax rate. Alternatively, if you have held an asset for more than one year, the capital gains rate is reset to 0% if your income is between $0 and $38,600, 15% if your income is between $38,601 and $425,800, and 20% if your income is over $425,800.
4. Canada
In Canada, capital gains tax only applies if you’re selling an asset through a non-registered trading account. If this is the case, capital gains are taxed under a 50 percent income inclusion rule. This means that if you sell an asset and realize a profit, 50 percent of the capital gain is assessed as personal income and taxed at your marginal income rate. Please note, if you own a farm, fishing property, or qualified small business, you may be eligible for Canada’s Lifetime Capital Gains Exemption.
5. Belgium
Even though Belgium has a reputation for higher-than-average personal and corporate taxes, it’s approach to capital gains taxation is actually extremely generous. In Belgium, if realized asset profits are not related to business activity, the capital gains are exempt from taxation.
Do Lower Capital Gains Tax Rates Stimulate Greater Economic Activity?
Despite years of intense scholarly debate, economists are yet to reach a consensus on the simulative effect of a lower capital gains tax rate. Proponents of lower tax rates believe that a reduction in capital gains taxation is needed to trigger an upsurge in capital asset trading activity, an event that would likely increase savings rates (primarily in the upper-income bracket) and moderately boost national economic growth projections.
Detractors of lowering the capital gains tax rate argue that any bump in economic growth will not only be statistically insignificant, it’ll also be inequitably distributed across income brackets. They also argue that because ownership of capital assets is concentrated in upper-income brackets, any reduction in the capital gains tax rate will inevitably lead to regressive outcomes in the tax system.
Irrespective of where you land on this debate, try to remember the relative insignificance of capital gains tax policy in comparison to the increasingly unconventional fiscal and monetary policy currently being deployed by governments and central banks in North America, Europe, and the Indo-Pacific. Considering the unprecedented conditions plaguing the global economy, now is probably not the best time to realize your hard-earned capital gains, regardless of your position towards the capital gains tax rate.
