31 May 2021
Understanding Capital Gains Tax
When individuals or businesses sell an asset, the net profit realized from that transaction may be subject to tax, this tax is known as capital gains tax. Determining how this asset will be taxed can depend on a number of different factors including the jurisdiction the asset is held in, the holding period, as well as the type of asset.
Understanding these factors will greatly benefit the individual or business to incorporate a strategy to minimize the taxes and keep more money in their wallets.
Short term vs long term capital gains
The holding period of the asset will drastically affect the capital gains tax rate. This holds true for many countries including the US, many countries in Europe, and even in tax havens in the Caribbean.
Short-term capital gains tax is the tax rate imposed on assets that are sold within 1 year of acquisition- these are typically subject to a less favorable tax rate compared to long-term capital gains (assets held longer than 1 year).
For example, St Kitts & Nevis imposes a capital gains tax of 20% on assets sold within 1 year of purchase and 0% if sold after a year. Short-term capital gains in the U.S are added to an individual’s federal income tax rate, which in some cases may push them into a higher tax bracket. However, long-term capital gains are taxed at a flat rate of 0%, 15%, or 20% depending on your taxable income and filing status. Please note, the U.S does include special rates for primary residencies and collectible assets such as fine art.
The UK on the other hand does not differentiate between short-term and long assets. It offers a tax-free allowance of up to £12,300 and will then determine the tax rate of the capital gain based on basic or higher income brackets, size of the gain, and whether the gain is from a residential property or other assets.
Are dividends capital gains?
Capital gains are the profits from a sale of an asset whereas dividends are the profits a company pays out to its shareholders. Some countries may treat taxes on dividends and capital gains similarly, however for the majority, the dividend tax rate and capital gains tax will be calculated separately. For example, Panama imposes a capital gains tax of 10% and a dividend tax rate of 5% on foreign-sourced income.
Capital gains on cryptocurrency
With the rise in the popularity of cryptocurrency, governments are starting to implement new tax regulations. In the U.S, for example, cryptocurrency is taxable and must legally be reported in your annual tax filings. However, determining how crypto is taxed, adds additional complexity to the U.S tax system. Buying and selling cryptocurrency will be treated similarly to stock investments and any profits will be considered capital gains and will be taxed accordingly. Cryptocurrency received in return for goods or services will be considered regular taxable income.
Some of the most crypto-friendly countries such as Singapore and Malaysia do not impose capital gains- this includes capital gains on cryptocurrency; Germany and Malta do not impose taxes on long-term capital gains and Portugal only imposes capital gains tax on businesses and not individuals.
Tax Saving Strategies For Our U.S Clientele
While it is always advisable to contact a U.S tax expert to offer sax-saving strategies to ensure you fully optimize your tax liabilities while complying with state and federal laws and regulations; U.S citizens and residents can implement a few tax-saving strategies including:
- Hold the asset for longer than a year
- Offset losses to reduce the total net capital gain
- Carryover capital losses exceeding USD 3000 to future years (keep records!)
- Invest through a tax-deferred fund such as a 401(k), Roth RA, and college savings account.
Amongst the best offshore financial centers in the world, the Caribbean offers some of the most attractive tax regimes where each jurisdiction offers 0-low tax rates on income, wealth, inheritance, dividend, and capital gains. Send us a note to [email protected] to learn more.
Written by Michelle Hammond
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