What Is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit from selling an asset like stocks, real estate, or cryptocurrency. The gain is the difference between what you paid (your cost basis) and what you sold it for.
For example:
- Buy Apple stock at $100
- Sell at $150
- Capital gain = $50
- Tax is due on that $50
Assets that can trigger capital gains tax include:
- Stocks
- ETFs
- Mutual funds
- Real estate (not your primary home, in most cases)
- Cryptocurrencies
- Collectibles
Short-Term vs Long-Term Capital Gains
The tax you pay depends on how long you held the asset.
Short-Term Capital Gains:
- Assets held less than 1 year
- Taxed as ordinary income
- Higher tax rates
Long-Term Capital Gains:
- Assets held for more than 1 year
- Benefit from lower tax rates
👉 This makes long-term investing more tax-efficient, especially for dividend and growth investors. Learn how to reinvest your returns in our compound growth guide.
Capital Gains Tax Rates in Different Countries
🇺🇸 USA
- Short-Term Gains: Taxed at ordinary income rates (10%–37%)
- Long-Term Gains: Taxed at 0%, 15%, or 20% based on income
| Income Bracket (2025) | Long-Term Capital Gains Rate |
|---|---|
| Up to $47,025 | 0% |
| $47,026 – $518,900 | 15% |
| Over $518,900 | 20% |
Bonus: No capital gains tax on assets passed on via inheritance (stepped-up basis).
🇨🇦 Canada
- Only 50% of the capital gain is taxable
- Added to your total income and taxed at your marginal rate
No difference between short and long-term gains here.
🇬🇧 United Kingdom
- Annual exemption: £3,000 (2025–26)
- Rates:
- 10% for basic-rate taxpayers
- 20% for higher-rate taxpayers
An additional 8% applies to residential property.
🇦🇺 Australia
- If held >12 months, you get a 50% discount
- The remaining is added to income and taxed at your marginal rate
How to Calculate Capital Gains Tax
- Selling Price – Purchase Price = Capital Gain
- Subtract any fees, commissions, and improvements
- Check if you qualify for any exemptions or deductions
- Apply the appropriate tax rate
Example (USA, Long-Term Investor):
- Bought: $10,000 worth of TSLA
- Sold: $18,000
- Gain: $8,000
- Tax Rate: 15%
- Tax Owed: $1,200
Exemptions and Deductions
Depending on where you live, you might be eligible for:
- Primary residence exemptions
- Small business exemptions
- Retirement account tax shields (Roth IRA, TFSA, ISA)
- Offsetting with capital losses
In the US, you can offset up to $3,000/year in capital gains with capital losses. This is called tax-loss harvesting.
Source: https://investor.vanguard.com/investor-resources-education/taxes/realized-capital-gains
Strategies to Reduce Capital Gains Tax
1. Hold Assets Long-Term
Take advantage of lower tax rates after 1 year.
2. Use Retirement Accounts
Invest inside Roth IRAs, 401(k)s, TFSA (Canada), or ISAs (UK).
3. Offset Gains With Losses
Sell losing positions to offset capital gains (aka tax-loss harvesting).
4. Gift Appreciated Assets
Give assets to lower-income family members in a lower tax bracket (check limits).
5. Donate to Charity
Avoid capital gains and get a tax deduction.
6. Timing Sales
Sell in a year when your income is lower or after retirement.
Capital Gains Tax on Real Estate
If you sell your primary residence, many countries offer tax breaks:
USA:
- Exempt up to $250,000 (single) or $500,000 (married) if:
- Lived in the home 2 of the past 5 years
- Owned the home for at least 2 years
Canada:
- Principal residence exemption: No capital gains tax on your main home
UK & Australia:
- Partial exemptions may apply for primary residences
- Tax applies to second homes and rentals
Capital Gains Tax on Crypto and NFTs
Crypto is treated as property, not currency, in many countries:
- Every time you sell, trade, or use crypto, a capital gain/loss is triggered
- NFTs follow similar tax treatment
Use crypto tax software like CoinLedger or Koinly to track your gains.
Final Thoughts
Capital gains tax can seriously eat into your investment returns—but with the right strategy, you can legally reduce what you owe.
Hold investments long-term
Invest via tax-advantaged accounts
Offset gains with losses
Time your withdrawals strategically
Understanding the tax system in your country is key to maximizing your wealth. Whether you’re buying your first ETF or selling a rental property, being tax-smart makes all the difference.
For more smart investing tips, visit our homepage or check out our latest finance guides.
