What is Capital Gains Tax?

Any time an investor makes a profit from selling an asset like stocks, bonds, or real estate, they pay a tax known as a capital gain. Capital gains tax applies to both financial and non-financial assets. It applies to the difference between the sale price and the original cost of the asset, known as the capital gain. Diligent investors always factor in the capital gain taxes tied to the assets they invest in to create tax-efficient portfolios. Learning how to invest in tax-efficient assets may seem complicated but it all boils down to the basics that this article covers. 

What Capital Gains Are Taxable?

Capital gains are taxed when investors make a profit by selling an asset they hold. The laws that shape capital gain taxes vary in different jurisdictions but they all tax proceedings from an asset sale. The capital gains tax rate in Kenya is currently at 15%, which applies to property sales and some other assets. 

Capital Gains Tax Rate in Kenya

In Kenya, a 15% capital gains tax is levied on the net profit made from the sale of an asset. This means if you invested Ksh 5 million in an asset and made a profit of 3 million, the capital gain tax only applies to the Ksh 3 million profit.

Similarly, the same principles apply to other investments, like stocks or bonds. If you are an investor using platforms like Ndovu, understanding the tax rate is key when planning long-term strategies for asset growth and selling your investments at the right time.

Exemptions on Capital Gains Tax

Certain transactions are exempt from capital gains tax, providing relief to individuals and businesses under specific circumstances. These exemptions include:

1. Income Taxed Elsewhere: In cases where property dealers’ income is already taxed under other provisions, it is exempt from capital gains tax.

2. Issuance of Shares and Debentures: When a company issues its own shares or debentures, the transaction is exempt from capital gains tax.

3. Transfers for Debt Security: Transfers made solely for securing a loan or debt, such as using property as collateral, are not subject to capital gains tax.

4. Transfers to Return Property Used as Security: If a transfer is made by a creditor to return property that was previously used as security for a loan, it qualifies for exemption.

5. Estate Transfers: Transfers made by a personal representative to a beneficiary during the administration of an estate are exempt from capital gains tax.

6. Spousal Transfers: Assets transferred between spouses, or former spouses as part of a divorce settlement or legal separation, are exempt.

7. Transfers to Immediate Family or 100% Family-Owned Companies: Assets transferred to immediate family members or to a company where spouses or family hold 100% of the shares are exempt from capital gains tax.

8. Securities Traded on Licensed Exchanges: Gains from the transfer of securities traded on exchanges licensed by the Capital Markets Authority are exempt from capital gains tax.

9. Private Residence: The sale of a private residence is exempt if the owner has lived in it continuously for at least three years prior to the sale, subject to conditions outlined in the Income Tax Act, Cap 470.

Final Thoughts

Capital gains tax can significantly impact the profits you earn from selling investments or property. Understanding what is capital gains tax and being aware of capital gains tax exemptions is crucial for making informed financial decisions. Whether you're investing in property, stocks, or other assets, being aware of the capital gains tax rate in Kenya and the available exemptions can help you maximize your returns while staying compliant with tax laws.