Nobody gets excited about tax. But here is the thing: the investors who understand how capital gains tax works tend to make fewer costly mistakes than those who learn about it after selling. Tax is not the enemy. Surprise is.
Capital gains tax (CGT) is the tax applied to profits made when selling certain assets, including shares, ETFs, and investment property. In Australia, it is not a separate tax with its own rate. The gain is added to your income and taxed at your marginal rate. This article explains the basics: what triggers CGT, how it is calculated, and why keeping good records matters more than trying to be clever.
This is general educational information, not personal financial advice. Tax situations vary, and you should consult the ATO or a registered tax agent for guidance specific to your circumstances.
What Triggers Capital Gains Tax#
CGT is triggered by a "CGT event." The most common CGT event for investors is selling an asset for more than it cost.
But selling is not the only trigger. CGT events include:
- Selling shares or ETF units. The most straightforward case. You bought at one price, sold at another, and the difference is your capital gain (or loss).
- Gifting an asset. Even if no money changes hands, transferring ownership can trigger CGT. The market value at the time of transfer is used.
- Receiving a return of capital. Some distributions from funds return your own capital rather than paying income. This reduces your cost base, which can create a larger gain when you eventually sell.
- Certain corporate actions. Mergers, demergers, and takeovers can trigger CGT events, sometimes in ways that are not immediately obvious.
The key point is that CGT is about disposal, not income. You do not pay CGT while holding an asset, no matter how much it appreciates on paper. The tax applies only when ownership changes.
This is why unrealised gains are sometimes called "paper gains." They exist, but they have not yet become taxable.
How Capital Gains Are Calculated#
The basic formula is simple:
Capital gain = Sale proceeds − Cost base
If you bought 100 shares at $10 each ($1,000) and sold them for $15 each ($1,500), your capital gain is $500.
But the details matter, and this is where record keeping becomes essential.
Cost Base#
The cost base is not just what you paid for the asset. It includes:
- The purchase price
- Brokerage on purchase and sale
- Any incidental costs of acquiring the asset
For shares, brokerage is often small relative to the purchase price, but it adds up across many transactions and can reduce your taxable gain.
The 12-Month Discount#
For assets held for more than 12 months before sale, individuals and trusts may be eligible for a 50% CGT discount.¹ This means only half the capital gain is added to your taxable income.
The discount is significant. A $10,000 gain on an asset held for 11 months is fully taxable. The same gain on an asset held for 13 months is effectively taxed on $5,000.
This is not a reason to hold assets longer than makes sense for your circumstances. It is a feature of the tax system that rewards longer holding periods, and understanding it helps avoid accidental short-term sales that could have been deferred.
Capital Losses#
If you sell an asset for less than its cost base, you have a capital loss. Losses can be used to offset capital gains in the same financial year or carried forward to offset gains in future years.
Losses cannot be used to reduce other income (salary, dividends, interest). They can only offset capital gains.
Some investors deliberately realise losses at year-end to reduce their tax liability. This is legitimate tax planning, but it requires careful record keeping and attention to wash sale rules (buying back the same asset within a short period).
The Record-Keeping Problem#
Most CGT mistakes are not about strategy. They are about records.
Consider this: you buy 50 shares of a company in 2024, another 30 in 2025, participate in a dividend reinvestment plan that adds small parcels quarterly, and then sell some shares in 2028. Which shares did you sell? At what cost? How long were they held?
Every purchase creates a separate "parcel" with its own cost base and acquisition date. When you sell, you need to know which parcels are being disposed of and what they cost.
The ATO accepts different methods for identifying which parcels are sold:
- Specific identification. You nominate which parcel is sold (e.g., "I am selling the shares I bought in March 2024").
- First in, first out (FIFO). The oldest parcels are treated as sold first.
- Other reasonable methods. As long as the method is consistent and documented.
The method you choose can affect your tax outcome. Selling older parcels may qualify for the CGT discount. Selling newer parcels may result in a smaller gain if prices have risen. But you cannot make this choice if you do not have records.
What to Keep#
For every investment, maintain:
- Purchase date
- Number of units or shares
- Purchase price (including brokerage)
- Any corporate actions that affect cost base (splits, consolidations, returns of capital)
- Sale date, price, and brokerage when disposed
Brokers provide trade confirmations and annual tax statements, but these are not always sufficient for CGT calculations, especially for assets held across multiple years or platforms. A personal record, whether a spreadsheet or dedicated software, is often necessary.
The tax office can audit CGT positions going back years. Records that seem tedious today become essential when the ATO asks questions.
Dividend Reinvestment Plans and CGT Complexity#
Dividend reinvestment plans (DRPs) are popular because they automate reinvestment and compound returns. But they create a specific record-keeping challenge.
Every DRP purchase is a new parcel. Over years of quarterly dividends being reinvested, an investor can accumulate dozens of tiny parcels, each with its own cost base and acquisition date.
When shares are eventually sold, each parcel must be accounted for. Some may qualify for the 12-month discount; others may not. Some may have a high cost base; others may have been acquired when prices were low.
This is not a reason to avoid DRPs. It is a reason to track them properly from the start. Many investors set up DRPs and forget about them, only to discover at tax time that they have a complicated mess to untangle.
The simplest approach: record every DRP purchase when it occurs. Do not wait until you sell.
Common Beginner Mistakes#
Forgetting brokerage. Brokerage is part of the cost base. Forgetting to include it means paying more tax than necessary.
Ignoring small transactions. The ATO has data matching. Even small sales are reported. Assuming they can be ignored is a mistake.
Not tracking DRPs. As described above, this creates problems that compound over time.
Panic selling without considering timing. Selling after 11 months means missing the 50% discount. For large gains, the difference can be substantial. This is not a reason to hold something you want to sell, but it is worth checking the acquisition date before acting.
Assuming the broker handles everything. Brokers provide statements, but they do not calculate your CGT for you. That is your responsibility (or your tax agent's).
When Cleverness Backfires#
It is tempting to view CGT as a puzzle to optimise. Harvest losses at year-end. Time sales to straddle financial years. Structure everything to minimise tax.
Some of this is legitimate. But for most beginner investors, the effort spent on tax optimisation would be better spent on record keeping and simplicity.
A missed record costs more than a suboptimal sale date. A forgotten parcel can create a larger error than any timing benefit would save. The investors who do best with CGT are usually not the ones running complex strategies. They are the ones who keep clean records and understand the basics.
Tax efficiency matters, but it is a second-order concern. The first-order concern is accuracy.
Summary#
Capital gains tax applies when you sell an asset for more than it cost. The gain is added to your income and taxed at your marginal rate. Assets held for more than 12 months may qualify for a 50% discount. Capital losses can offset gains but not other income. The most common CGT mistakes involve record keeping, not strategy: forgotten brokerage, untracked DRP parcels, and missing acquisition dates. Every purchase creates a parcel with its own cost base and holding period. Maintaining accurate records from day one is more valuable than clever tax planning. For specific guidance, consult the ATO or a registered tax agent.
Sources#
- Australian Taxation Office. (2024). CGT discount. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount
- Australian Taxation Office. (2024). Keeping records for CGT. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/keeping-records-for-cgt
- Australian Taxation Office. (2024). CGT events. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-events