Capital Gains Tax Explained: Rates, Rules & How to Reduce Your Bill

Selling an investment at a profit feels good — until you realise a significant portion goes to the government. Capital gains tax (CGT) is the tax on profit from selling assets: shares, investment properties, cryptocurrency, bonds, and in some cases other valuables. The rules differ enough between countries that what's a good strategy in the US can be suboptimal in Australia, and vice versa.

The core concept: realised vs. unrealised gains

Capital gains tax is only triggered when you realise a gain — i.e., sell the asset. An investment that has grown by 50% has an unrealised gain; you don't owe tax until you sell. This creates a powerful deferral strategy: holding assets long enough often both reduces your rate (in the US) and defers the tax liability, allowing the full pre-tax amount to compound.

Cost basis is what you paid for the asset. Your taxable gain is: Sale price − cost basis − selling costs. Selling costs (broker commissions, fees) reduce your gain.

United States — Capital Gains Tax 2025

The US has two CGT regimes depending on holding period:

Short-term gains (held ≤ 1 year)

Taxed as ordinary income at your marginal rate (10–37% federal, plus state tax). No special treatment. If you're in the 22% bracket, short-term gains are taxed at 22%.

Long-term gains (held > 1 year)

Preferential federal rates for 2025:

• 0% for taxable income up to $48,350 (single) / $96,700 (MFJ)
• 15% for most middle-income taxpayers
• 20% for taxable income above $533,400 (single) / $600,050 (MFJ)

Plus the Net Investment Income Tax (NIIT): an additional 3.8% on investment income (including long-term gains) for high earners (above $200,000 single / $250,000 MFJ), bringing the top effective federal CGT rate to 23.8%.

US example

You sell shares bought 2 years ago for $10,000 cost basis at $22,000 (gain: $12,000). You're a single filer with $80,000 in ordinary income (placing you in the 22% bracket for ordinary income but the 15% bracket for long-term gains). Federal CGT: $12,000 × 15% = $1,800. Compared to $2,640 if it had been short-term. Holding that extra year saved $840.

United Kingdom — Capital Gains Tax 2025/26

The UK operates differently. Each individual receives an Annual Exempt Amount — £3,000 for 2025/26 (reduced from £12,300 in 2022/23). Gains above this allowance are taxed at:

• Shares and most assets: 18% (basic rate taxpayer) or 24% (higher/additional rate taxpayer) — rates changed from April 2024
• Residential property (not your main home): 18% (basic rate) or 24% (higher rate)
• Business assets (Business Asset Disposal Relief): 10%, lifetime limit £1 million

Whether you're a basic or higher rate taxpayer for CGT purposes depends on your total income including the gains: if your gains push your total income above the basic rate band (£50,270), the excess is taxed at the higher CGT rate.

UK example

You have salary income of £38,000 and realise a £15,000 gain on shares sold in 2025/26. Taxable gain = £15,000 − £3,000 exemption = £12,000. Your salary already uses up some of the basic rate band: remaining basic rate band = £50,270 − £38,000 = £12,270. The full £12,000 gain falls within the basic rate band. CGT: £12,000 × 18% = £2,160.

Canada — Capital Gains Tax 2025

Canada's approach: 50% of capital gains are included in taxable income and taxed at your combined federal + provincial marginal rate. As of 2025, proposed (but contested) changes would raise the inclusion rate to 2/3 for gains above $250,000 annually for individuals — check the current CRA guidance for the status of these changes.

At the standard 50% inclusion rate with a 40% marginal rate (federal + provincial combined), effective CGT rate = 50% × 40% = 20%.

The Lifetime Capital Gains Exemption (LCGE) is a significant benefit: $1,250,000 (2025) in capital gains from the sale of qualifying small business shares or farm/fishing property is exempt — a major incentive for business owners.

Australia — Capital Gains Tax 2025/26

Australia's system is similar to Canada's inclusion approach but with a 50% discount for assets held over 12 months:

• Short-term (held ≤ 12 months): 100% of the gain included in assessable income, taxed at your marginal rate
• Long-term (held > 12 months): only 50% of the gain is assessable, effectively halving your CGT rate

Your main home is generally CGT-exempt. Investment properties are not — when you sell a rental property held for more than 12 months, you pay CGT on 50% of the gain at your marginal rate.

Australian example

You sell shares with a $40,000 gain after holding them for 2 years. You're in the 37% bracket. Assessable gain (50% discount): $20,000. CGT payable: $20,000 × 37% = $7,400. Effective rate on the full $40,000 gain: 18.5%.

Key strategies to reduce CGT

• Hold for the long-term threshold. In the US: hold over 12 months. In Australia: hold over 12 months for the 50% discount. In the UK: the tax-free allowance applies regardless of holding period, but timing realisation into a lower-income year helps.
• Use tax-loss harvesting. Realise losses in the same tax year to offset gains. Sold a loser? The loss offsets your gains pound-for-pound. (Watch "wash sale" rules in the US: you can't buy the same or substantially identical security within 30 days before/after selling at a loss.)
• Use tax-sheltered accounts. US: gains inside a Roth IRA are never taxed. UK: gains inside an ISA are CGT-free. Canada: gains inside a TFSA are tax-free. Australia: gains inside superannuation are taxed at 10% (concessional) or 0% (pension phase).
• Spread realisations across tax years. In the UK, you can use your annual exemption (£3,000) each year. Selling in tranches across multiple years can save CGT vs. selling everything at once.
• Gift to a lower-rate spouse. In the US and UK, you can transfer assets to a spouse (or civil partner) before selling; if they're in a lower tax bracket, the gain is taxed at a lower rate. Specific rules apply in each jurisdiction.

Cryptocurrency and CGT

Cryptocurrency is treated as a capital asset in all four countries. Every disposal — sale, swap, or using crypto to buy goods — is a taxable event. The tax principles (short vs. long-term, inclusion rates, exemptions) apply exactly as for shares. The practical challenge is tracking cost basis across hundreds of small transactions, which is why specialist crypto tax software exists.