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· Posted on
February 21, 2024

What is capital gains tax?

When you make money on a share trade or other investments, you often speak about your #gains. But with #gains comes #taxes.

What's the key learning?

  • Capital gains tax is the tax you have to pay on any money you’ve made from selling an asset, like shares, crypto and even an investment property
  • You do this by reporting your gain to the tax office at tax time
  • It forms part of your income tax, which means the money you profit gets added to your income, and you pay tax at your individual tax rate on the total. 

The dopamine hit of making a profit on an investment is pretty unreal. It’s like scoring the winning goal just when the siren in a sporting game goes off.

But unlike the heroics on the sporting field, those gains in the financial world can come with strings attached.

Yep - we’re talking about capital gains tax (CGT).

CGT is a tax that we’re required to pay on profits from a sale (and sometimes trade or gift) of an asset, like shares, crypto, an investment property or even valuable collectables.

Think art, rugs, antiques, stamps, coins or alcoholic beverages.

Although it’s called capital gains tax, it’s actually a form of income tax. 

That means your net capital gains are added to your income, and you pay tax on the total at your marginal tax rate. 

Can’t remember what all these terms mean? Check out our Tax Academy

Yep - it’s not an entirely new tax.

What’s net capital gains?

You only pay capital gains tax when you’ve actually sold the asset for more than what you purchased it for.

So if you sell an asset for:

  • More than it cost to purchase - you’ve made a capital gain
  • Less than it cost to purchase - you’ve made a capital loss

Your net capital gains are:

  • Your total capital gains across all your disposed assets, eg. the gain you made on Afterpay shares if you bought in early.
  • Minus your capital losses from other disposed assets eg. that $5,000 NFT that you thought would make you millions but actually re-sold for $50
  • Minus any discount you’re entitled to on your gains.

That’s the amount you’ll be paying tax on. And you do this by reporting your gain to the tax office at tax time.

What’s the CGT discount?

If you’ve owned an asset for more than 12 months before it’s sold, exchanged, or given away, the CGT can be reduced by 50%. The ATO’s created this rule to reward long-term investment.

Let’s look at two different examples of CGT; one with and one without the 50% discount.

Example without CGT discount

Let’s say you bought $5,000 worth of shares in Mattel because you really loved the Barbie movie. 

6 months later your shares are worth $5,500 and you decide to sell the shares to realize your gain.

That means you’ve made a capital gain of $500.

Assuming you didn’t sell any other assets in that tax year, you’ll declare a capital gain of $500.

If your salary is $80,000, the $500 will become part of your income. 

That means you’ll pay tax on a total income of $80,500 at your marginal tax rate.

Example with CGT discount

Let’s say you buy an investment property for $600,000 (just go with it - even if it sounds totally whack).

Two years later you sell that property for $700,000, meaning you’ve made a capital gain of $100,000 on your investment property.

Since you’ve had that property on your hands for over 12 months, you’re entitled to a 50% CGT discount. 

This means you only need to pay tax on 50% of your gain, so $50,000. The other $50,000 gain is tax-free.

If your salary is $80,000, you’ll be taxed on an income of $80,000 + $50,000 = $130,000 at your marginal tax rate (assuming you made no other asset sales in that year).

Are there any assets exempt from CGT?

Any assets acquired before 20th September 1985 aka the date CGT was introduced, are exempt from the tax. 

Cars and motorcycles are also exempt from CGT because they’re generally depreciating assets.

Especially if you ride them like this.

Your main residential property is also in the clear when it comes to CGT. However CGT could apply if you use the property to generate income such as:

  • Renting out part of your home
  • Using your home to run a business

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