Capital Gains Tax Explained: US, UK, Australia and Canada

What Is Capital Gains Tax?

Capital gains tax (CGT) is a tax on the profit you make when you sell an asset for more than you paid for it. You do not pay CGT on the full sale price — only on the gain, which is the sale price minus the original purchase price.

For example: if you bought shares for $5,000 and sold them for $9,000, your taxable gain is $4,000. The other $5,000 is simply a return of your own capital and is not taxed.

CGT is not the same as income tax, though it interacts with your income level in most countries — your income determines which CGT rate band you fall into. Most countries also exempt your primary home from CGT, subject to certain conditions.

One important distinction: CGT is triggered on disposal, not on paper gains. You only owe tax when you actually sell the asset. Unrealised gains — where the asset has risen in value but you have not yet sold — are not taxed in any of the four countries covered here.

US Capital Gains Tax

The United States applies two tiers of CGT based on how long you held the asset before selling.

Short-term gains (assets held for one year or less) are taxed as ordinary income, at the same federal marginal rate as your wages — up to 37% depending on your total income.

Long-term gains (assets held for more than one year) qualify for preferential rates of 0%, 15%, or 20%, depending on your taxable income for the year.

High earners may also owe the Net Investment Income Tax (NIIT): an additional 3.8% on investment income for those with modified adjusted gross income over $200,000 (single) or $250,000 (married filing jointly).

Unlike the UK, the US does not offer a blanket annual CGT exemption. Every dollar of taxable gain is potentially subject to tax, though you can offset gains with capital losses from other investments in the same year.

UK Capital Gains Tax

The UK provides an annual exempt amount of £3,000 (for the 2024/25 tax year). Gains below this threshold are entirely tax-free. Only the amount above £3,000 is subject to CGT.

The rate you pay depends on both the type of asset and your income tax band:

• Shares and other investments: 18% for basic rate taxpayers, 24% for higher and additional rate taxpayers.
• Residential property (second homes and buy-to-let): 18% or 24%, matching the rates for investments.
• Business assets via Business Asset Disposal Relief: a reduced rate of 10% applies on the first £1 million of qualifying lifetime gains.

Investments held inside a Stocks and Shares ISA are completely exempt from CGT — this is one of the most compelling reasons to use your annual £20,000 ISA allowance every year before investing in a taxable account.

Capital losses from other assets can be used to offset gains in the same tax year, or carried forward indefinitely to offset future gains.

Australian Capital Gains Tax

Australia does not have a separate CGT rate. Instead, capital gains are added to your ordinary income and taxed at your marginal rate, which can reach up to 45% plus a 2% Medicare Levy.

The key relief is the 50% CGT discount: if you hold an asset for more than 12 months before selling, only 50% of the gain is included in your taxable income. This effectively halves the tax burden for long-term investors.

For example: suppose you make a $20,000 gain on shares held for 18 months. After applying the 50% discount, $10,000 is added to your income. At a 34.5% marginal rate, the tax owed is $3,450 — an effective CGT rate of just 17.25% on the original gain.

Cryptocurrency is treated as an asset under Australian tax law, not as currency. CGT applies on every disposal — including swapping one crypto for another or using crypto to purchase goods.

Your primary residence is generally fully exempt from CGT, provided it has been your main home throughout the ownership period.

Canadian Capital Gains Tax

Canada uses an inclusion rate system. As of 2024 rules, 50% of a capital gain is included in your taxable income, and that included portion is taxed at your regular marginal income tax rate (combined federal plus provincial).

For example: a $20,000 gain results in $10,000 being added to your income. At a combined marginal rate of 33%, the tax owed is $3,300 — an effective rate of 16.5% on the original gain.

Two registered accounts shelter gains entirely:

• TFSA (Tax-Free Savings Account): investments grow and can be withdrawn completely tax-free — no CGT, ever.
• RRSP (Registered Retirement Savings Plan): gains inside the account are sheltered from tax while they remain in the account, though withdrawals are taxed as income.

Maximising your TFSA contribution room each year is one of the most powerful CGT-reduction strategies available to Canadian investors.

How to Reduce Your CGT Bill (All Countries)

There are several legitimate strategies to reduce the amount of CGT you owe, regardless of which country you live in.

• Use tax-sheltered accounts first: ISA (UK), superannuation (AU), TFSA and RRSP (CA), Roth IRA and 401(k) (US). Gains inside these accounts are tax-free or tax-deferred. Fill these before investing in a taxable account.
• Hold assets for the qualifying long-term period: more than one year in the US (to access the 0%/15%/20% rates), or more than 12 months in Australia (to access the 50% discount).
• Offset gains with losses: selling investments that have fallen in value realises a capital loss, which can be used to offset gains in the same tax year and reduce your overall CGT bill.
• Spread gains across tax years: if you are close to a rate threshold, consider selling part of a position this year and the remainder in the next tax year to keep gains within a lower bracket.
• Bed and ISA (UK): sell shares in a taxable account and immediately repurchase them inside an ISA. Future gains on those shares will be entirely CGT-free.