How capital gains tax is calculated on shares

The most common misunderstanding about capital gains tax is that it is a tax. It is not a separate tax with its own rate. A net capital gain is added to your assessable income for the year and taxed at whatever marginal rate that income falls into, alongside your salary.

That has a consequence people miss: the same gain costs different amounts depending on what else you earned that year. A $10,000 gain sitting in the 32% bracket and the same gain sitting in the 45% bracket are not the same gain.

The calculation

For a single parcel, the gain is what you received on disposal minus the cost base of what you disposed of. The cost base is not the purchase price alone — it includes brokerage on the way in and on the way out, and certain other costs of holding and disposing.

The order is fixed, and it is not the order you would choose

Capital losses are subtracted from capital gains before any discount is applied, not after. That ordering is set by the rules rather than by preference, and it is why a loss is worth more against a gain that is not eligible for the discount than against one that is.

• Work out the gain or loss on each CGT event for the year.
• Apply current-year capital losses against the gains.
• Apply any capital losses carried forward from earlier years.
• Apply the discount to whatever discountable gain is left.
• Add the result to your assessable income.

Which method applies

For an asset held at least twelve months, individuals reduce the remaining gain by 50%. For anything held less than twelve months there is no reduction and the full gain is assessed. Assets acquired before 21 September 1999 can instead use an indexation method, which adjusts the cost base for inflation up to that date.