Capital Gains Tax a Scam?

[Struzball]

Say you buy $10,000 worth of XYZ in 1970.

According to this in 2007's dollars it would be worth $89871.98

From that you take away 40%, it's then worth $35948, which is more like equivalent to an initial investment of 1970 dollars of $40,000.

So it seems like a gain of 79,000 would be alot, but really it's a loss of $54,000 of today's dollars, a years salary paid directly to the government.

There is clearly something wrong with the rule that you pay x amount, sell for x amount + y amount, and pay 40% tax on y amount.

..Or is capital gains tax usually worked out after compensating for inflation.

 

[Prospector]

If you bought in 1970 then you wouldnt be paying CGT for a start. If you bought after September (?) 1985 and you hold for over 12 months, then any profit, less costs of holding/selling are reduced by 50%. Then this amount is added to your total income for the year. Depending what that income is, you might actually pay no tax at all.

Inflation used to be used in CGT calculations, but that changed in around 1999. You get the choice of which method you use if you bought before the changeover date, but invariably the discount method is better.

And I am not sure where you got the 40% tax from.

 

[Struzball]

I'm aware of the cutoff date, I was using it as an example for future CGT, because before 1966 the calculator uses pounds instead of dollars.

I invented the 40%.. but still either way, even with taking away half the full 50%, you're still at a 25% loss due to inflation.

So are you saying if you are selling over a long period where inflation actually counts, you are still able to counter for inflation in your CGT calculations? In which case disregard.. because I wasn't aware you could do that.

 

[alphman]

even with taking away half the full 50%

now that's an interesting sentence! :

Anyway, Struzball, you've got your calcs all wrong mate...

Firstly, your CGT would be $79871.98 (89871.98 - 10,000) and not $89871.98. Also note the +12month/50% incentive.

Secondly, if you want to take away 40%, it means you're left with 60%. Therefore, based on your taxable figure of $89871.98, you would be left with $53923.19 (being the 60%).

Thirdly, you have somehow misplaced/misread the decimal point in your reverse calculation. ($35948 in 2007 dollars is equivalent to $4000 in 1970 dollars according to that site)

 

[GreatPig]

if you are selling over a long period where inflation actually counts, you are still able to counter for inflation in your CGT calculations?

Not that I'm aware of, for inflation after 30 Sept 1999.

If you invest in something that just keeps up with inflation, then yes, after tax you will have negative real growth.

Same with cash in the bank if the interest rate is the same as the inflation rate, although there's no 50% discount on income.

GP