Capital gains tax on shares, explained
An unrealised gain is untaxed and compounds. Selling converts a tax-deferred asset into a tax bill.
Understand the tax consequence before you press sell. (Information, not advice; rules change and depend on your circumstances.)
How Capital gains tax on shares works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
- 1
Tax is due on the gain, when you realise it
Holding a share that has doubled costs you nothing in tax. Selling it does. The gain is the sale proceeds minus what you paid, and it becomes taxable the moment you crystallise it.
- 2
Deferral is itself a return
An unrealised gain compounds on the full amount, including the part you would otherwise have handed to the exchequer. Sell and rebuy the same holding and you have paid tax for the privilege of owning the same thing.
This is a real argument for holding good businesses and against churning them. It is not an argument for holding bad ones.
- 3
There is an annual allowance, and it does not roll over
A slice of gains each year is exempt. Unused, it disappears. Realising gains up to the allowance each year, deliberately, resets your cost base for free, which is one of the few genuinely free things available.
- 4
And the wrapper makes all of this moot
Inside an ISA or a pension, none of it applies. Which is why the first question is never 'how do I manage my capital gains tax' but 'why is this money not in a wrapper'.
You know your unused allowance this year, and whether using it is worth doing.
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An unrealised gain is untaxed and compounds. Selling converts a tax-deferred asset into a tax bill.
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