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Capital gains tax, explained: basis, holding periods and the wrappers that dodge it
How capital gains tax works: realisation, cost basis, long-term versus short-term rates, loss offsetting, and why the account matters more than the asset.
Every investment that goes up creates a quiet, invisible event: an unrealised gain, which the taxman ignores. Sell it, and the gain becomes real — and taxable. Capital gains tax is the toll booth on investment profits, and like the marginal-tax guide, it rewards understanding with genuinely legal ways to pay less.
The mechanics: basis, realisation, holding period
The tax applies to the gain, not the sale price: what you received minus your "cost basis" (usually the purchase price plus costs). It is triggered by realisation — a sale, swap or disposal — so a portfolio that triples on paper and is never sold generates no capital gains tax. Holding period matters enormously in the US: assets held a year or less are taxed at ordinary income rates as short-term gains, while holdings beyond a year qualify for long-term rates — preferential rates that sit well below income tax for most earners. The UK runs its own system: an annual tax-free allowance, then percentage rates that differ between ordinary assets and residential property, with rates and allowances revised regularly — check gov.uk for the current year rather than trusting any article's numbers, including this one.
Losses are tax assets
The system's one piece of symmetry: realised losses offset realised gains. Sell a losing holding against a winning one and the taxable gain shrinks; in the US, losses beyond your gains can offset a slice of ordinary income each year, with the excess carried forward indefinitely — a strategy known as tax-loss harvesting, most valuable in taxable accounts. The catch is a wash-sale style rule (US: repurchasing the same asset within 30 days disallows the loss; the UK applies "bed and breakfasting" restrictions). The deeper lesson for portfolio design sits in the index funds guide: low turnover means fewer realisation events, and index funds realise far less than active churn.
The account decides everything
Before optimising gains, optimise where assets live. Tax wrappers — the US 401(k) and IRA, the UK ISA and pension — shelter growth from capital gains tax entirely; in a Roth ISA-equivalent structure, the gains come out tax-free for good. This is why two investors with identical portfolios and identical returns can pay wildly different tax: one traded inside wrappers, the other in a taxable account. The sequencing rule writes itself: highest-turnover, highest-growth assets go inside wrappers first; the taxable account gets the buy-and-hold core.
Three honest caveats before you plan around any of this. First, rules move — thresholds, rates and allowances change with nearly every budget or administration, and the numbers in old articles are the most common source of expensive mistakes. Second, trading activity has its own characterisation issues, covered in the trading taxes guide. Third, the tax tail should never wag the investment dog: a tax bill on a profitable sale is the sound of a plan working. The goal is not zero tax; it is paying the right tax, at the right time, on the right account — which is what the ladder guide assembles into a full picture.
Sources and further reading
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General information, not financial advice. Everything on BRYME Money is educational. Trading forex, crypto and derivatives involves substantial risk of loss and is not suitable for everyone. Past performance — including any published research — does not guarantee future results. Never trade money you cannot afford to lose.