What is Capital Gains Tax (with bonus story of ‘Ye Olde History of Tax’)

The Clever Investor Podcast

Basically, you buy and asset for one price and sell it for another price, the difference between the amounts is your capital gain or if you didn’t make any profit, that’s a ‘Capital Loss’. When we sell an asset, such as investment properties, shares or a business this triggers what’s called a ‘Capital Gains Tax event’ Let go back in time and have a look at what Tax is. Tax has been in the world for hundreds and hundreds of years and back in ye olden days it often had a spasmodic history mainly because it was usually associated with some sort of national emergency. The oldest types of direct taxation were either to pay off invaders or to fund a war so you could go off and invade some other country. In these ancient times, a city or region would run over and launch an attack on their neighbouring area, and if the battle went well and they overthrew the locals they would make them pay so the attacking would stop. This payment was often referred to as a tribute. The imposers of these taxes were the leaders of the times, either the government or a good old blood thirty royal family. After a while the leaders realised that it might be a good idea to continue the tax even after the extinction of its original purpose, normally this would be under the heading of defending the kingdom. Today, tax is money that us, the people have to pay to the government. When we sell an asset, such as investment properties, shares or a business this triggers what’s called a ‘Capital Gains Tax event’ Basically, you buy and asset for one price and sell it for another price, the difference between the amounts is your capital gain or if you didn’t make any profit, that’s a ‘Capital Loss’. But let’s say you do receive more for your asset than you paid for it, congratulations you’ve made money, but you'll have made a capital gain and you may need to pay this ‘Capital Gains Tax’. How much Capital Gains Tax will I pay? The amount of Capital Gains Tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses. Your marginal tax rate is important because your capital gain will be added to your total income in that financial year’s tax return. The length of time you’ve held your asset is relevant because if you’ve held the asset for over 12 months, certain taxpayers can generally get a 50% discount on their capital gains tax. What if I make a capital loss? If you’ve sold your assets for less than you paid for it, you’ve made a capital loss. However, the good news it, if you make a capital loss, you can potentially use it to reduce a capital gain in the same financial year.