Trading on the capital markets is an integral part of the global economy and allows individuals, corporations, and governments around the world to take advantage of an interconnected economy and achieve greater prosperity as a result.
Buying and selling financial instruments, such as stocks, currencies, bonds, cryptocurrencies, and commodities, is often subject to taxation. This type of tax is called a capital gains tax and taxes the difference between the buying and selling prices as long as the difference is positive.
Typically, jurisdictions worldwide take different approaches to long-term and short-term capital gains taxes, with short-term gains taxed at higher rates.
However, tax regimes are not uniform, and investors will encounter plenty of differences depending on where they choose to conduct their business.
How Capital Gains Taxes Work
Capital gains taxes are charged after a transaction has been finalized and gains have been realized. For example, suppose an investor buys 100 Apple shares at $170 per share and sells them a week later for $175. This means that the taxable short-term capital gains amount to $500.
Capital gains taxes are typically part of a progressive tax regime, meaning their rates are divided into income brackets.
For example, someone in the lowest income bracket may have to pay 10%, while another investor in the highest income bracket may be subject to as much as 37% of the capital gains. Capital gains are usually classified and taxed as ordinary income when individuals file their tax returns.
Taxes for financial trading activities are not a new phenomenon and have been around for decades. However, the discussions surrounding their effectiveness and the ability to generate substantial tax revenue are still debated among policymakers.
Countries That Charge Capital Gains Tax
United States
The United States offers the most nuanced and multi-level capital tax gains regime for investors, with seven different tax brackets for short-term capital gains.
This is because the IRS treats short-term capital gains as ordinary income divided into seven brackets based on annual income. The brackets can be broken down into the following:
- 10% – $0 to $11,000
- 12% – $11,001 to $44,725
- 22% – $44,726 to $95,375
- 24% – $95,376 to $182,100
- 32% – $182,101 to $231,250
- 35% – $231,251 to $578,125
- 37% – $578,126 or more
It must be noted that the individual tax brackets are subject to change, and it is advisable to check the latest updates issued by the IRS.
Canada
Capital gains taxes in Canada are more nuanced and complex thanks to a rule that 50% of applicable capital gains are actually qualified for capital gains taxes.
To better understand how capital gains taxes work in the country, we must consider several key factors:
- For individuals whose capital gains exceed $250,000, 66.67% of their gains are taxable
- 50% of capital gains are taxable in Canada and are added to an individual’s income for the year
- The maximum rate of capital gains tax is 27%
As we can see, the maximum capital gains tax in Canada is 10% lower than that of the United States. However, 27% is still not considered to be a particularly low rate of capital gains tax when compared to other countries that do not charge such a tax on the sale of securities.
France
France is a country that has a relatively high tax burden to fund its social services. The capital gains tax on financial securities in particular, is charged at a rate of 30%, which includes the 12.8% for income tax and 17.2% for social levies.
While the tax rate is high, individuals can see what portion of their taxes goes for social services in the country, while the income tax is part of the overall national budget.
Overall, France is one of the most developed economies in the EU and offers numerous safety nets and assistance programs to its residents, which comes at a higher tax burden.
Countries That Don’t Charge Capital Gains Tax
United Arab Emirates
The UAE and Dubai, in particular, attract thousands of high-net-worth individuals who move their businesses to the country to benefit from low taxation.
Historically, the United Arab Emirates did not charge any taxes on foreign investors but has introduced 5% VAT and 9% corporate profit taxes.
Regardless, the country remains one of the most tax-friendly destinations in the world and one of the few countries that does not charge any capital gains tax on the trading of financial instruments.
Switzerland
Switzerland is a developed economy that attracts high-net-worth individuals thanks to its stable political climate and business-friendly approach.
While Switzerland is far from a low-tax country, it does not charge any capital gains tax on the sale of stocks and forex, which reduces the overall tax burden for short-term traders.
While practically every EU nation upholds capital gains taxes, Switzerland is not a member, giving it more autonomy in taxation and budget management.
Monaco
The Principality of Monaco has long been an attractive destination for the ultrarich. One key factor for this, other than political stability, has been the favorable tax regime for internationals.
Monaco does not even collect personal income taxes or property taxes. Rather, the country relies on corporate profit taxes and a 1% tax collected from rental properties.
For this reason, many international investors have residence permits or dual citizenship with Monaco, which allows them to conduct business with a minimal tax burden on personal income.
