After increasing the oil embargoes and reducing the country’s revenues, receiving taxes is one of the best options that can help the government in providing part of the financial resources for running the country.

There are different types of taxes. But one of the types of taxes that has recently attracted the attention of Iranian citizens is the capital gains tax plan. The initial plan of capital gains tax was presented to the parliament in 2009 and finally the general principles of this plan were approved on 05/03/1400. Now the question is raised for many people, what is the capital gains tax? Which assets are subject to capital gains tax and who will be subject to paying it?

In this article, we try to answer these questions by introducing this type of tax, how it is calculated and how to pay it. If you stay with us until the end of this article, all your questions about capital gains tax will be answered. At the end, examples of how to calculate capital gains tax will be mentioned so that you can measure your situation in facing this law.

What is capital gains tax?

Capital gains tax is a type of tax that is imposed on the profit from the transfer of non-productive assets. In fact, people have to pay taxes on the profit they earn from the sale of their capital or assets.

For example, suppose a few years ago, you bought a house for 100 million Tomans, and today the value of your house has reached 700 million Tomans. Therefore, your housing income is equal to 600 million tomans. If you sell, you will have to pay capital gains tax on your home.

History of capital gains tax in Iran and the world

Capital gains tax is not a new issue in the world. This law has been implemented in the world for more than a century; But during the last half century, it has spread with a remarkable speed in the countries of the world.

This law was implemented for the first time in 1913 by the United States of America. Until about 50 years, America was the only country that had a separate and complete law for this type of tax. Finally, in 1965, with the sudden increase in housing prices in Europe, this law was officially approved and enforced in 180 European countries.

The history of capital gains tax in Iran also goes back to the 60s. This plan was proposed for the first time in the 60s and was even implemented to some extent, but due to the incomplete economic information of taxpayers as well as the existence of corruption in the tax system and other related institutions, the implementation of this plan was stopped and its law was canceled.

What is the difference between capital gains tax and value added tax?

If we want to provide a general classification for taxes, we can divide them into two categories: direct taxes and indirect taxes. Many people may think that capital gains tax is the same as value added tax, but this is completely wrong. Although these two taxes have similarities, they are completely different in nature.

Value added tax is a type of indirect tax   that is assigned to the added value created for goods and services that are included in the production cycle or are productive. In fact, the consumer pays this type of tax indirectly by buying goods and services.

While the tax on capital gains is one of the  direct taxes  and is assigned to assets whose owners have not created any added value and only profit through the transfer of these assets. In fact, all assets that are not in the production to supply chain and are transferred without any change or added value are subject to capital gains tax.

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What is the purpose of implementing the capital gains tax plan?

The most important goals of the capital gains tax plan are the following:

✔️Creating tax justice in order to achieve social justice

✔️Integration, coherence and improvement of tax system performance

✔️Control of speculation and speculation in various areas including real estate, gold, etc

✔️Preventing tax evasion of taxable assets

✔️Reducing class differences and fair distribution of income among different strata of society

✔️Supporting production and productive investments for economic growth

✔️Elimination of mediation

✔️Preventing the unusual growth of prices in the housing, gold, etc. markets and the transformation of assets from capital to consumption

✔️Reduction of inflation rate

Who is included in capital gains tax?

How many percent of people in the society does this law cover? With the approval of this law, do all members of the society have to pay tax on a part of their property?

Capital gains tax is specific to those who   conduct transactions in various fields that are often unproductive and cause speculation in that field. The goal of these people is to earn huge profits and capital by transferring assets without creating any value in them. In such a situation, the government can legally collect taxes based on the income generated in their capital.

In the capital gains tax plan, the exemptions are designed so that people’s consumption demand in assets such as housing, cars, gold and jewelry is not taxed. Also, the number and amount of exemptions of this plan are determined in such a way that very few people in the society are taxed. According to statistical evidence,  less than 5% of people in the society are subject to this type of tax.

What does the capital gains tax include?

Capital gains tax is imposed on the profit from the sale of any non-productive assets. These assets include real estate, land, various securities, antiques, works of art, cars, and any non-productive assets that you have profited from selling. Of course, in different countries, the assets that are subject to this type of tax are different, and their selection depends on the economic and political situation of that country.

When should capital gains tax be paid?

Capital gains tax is only levied on your assets if you sell them and make a profit. As long as you own your property, it is not taxed. In short, all the assets that people earn through their brokerage are subject to capital gains tax.

The most important source of capital gains tax that has attracted the attention of society today is the tax on housing and stocks. Stay with us to explain these two things further.

Income tax on housing and real estate

If a person buys a residential (or non-residential) property and sells it after a certain period, the income of that property will be subject to tax.

In fact, if the distance between buying and selling housing (or non-residential property) is less than a certain period of time, the profit from its sale is taxed; Because it is assumed that the transaction made in this field is a kind of non-productive or brokerage activity and is done only to earn profit. The most important goal of determining this type of tax is to prevent inflammation of the housing and real estate market.

How to implement the tax on housing income is different in different countries. Usually, a person is not required to pay taxes for a housing. Also, in some cases, the housing in which a person lives, will be exempt from paying tax on housing income. On the other hand, in some laws, the time interval between buying and selling housing or its number determines the tax rate on housing income.

Tax on the income of coins, gold and foreign currencies

Coins, gold and jewelry are among the goods that are subject to capital gains tax. Because speculative activities and creating false demand for these goods can increase their prices and inflame the market. On the other hand, the coin and gold market is one of the markets that can generate huge profits for buyers. For this reason, the government has decided to curb speculation in the coin and gold market and create balance in the market by levying a tax on capital gains.

Since the trading of foreign currencies is considered an unproductive activity, the purchase and sale of these currencies are subject to the capital gains tax law.

Car income tax

In any country, the capital gains tax law has not been implemented for cars; Because the car is a consumer product and cannot be seen as a capital product. But in Iran, due to supply conditions and the increase of speculators in the car market, this product has become a capital item. Therefore, policy makers have decided to implement the capital gains tax law for cars in order to organize the car market and reduce speculation in this market. Of course, there are criticisms regarding this law that must be completely resolved.

For example, the car seller may add the tax specified in the capital gains tax law to the car price.

Also, real consumers may refuse to pay the capital gains tax due to the sale of the car. As a result, with the decrease in supply, the prices in the market will increase.

Income tax on shares

Tax on share income is one of the other types of capital income tax, which is considered the biggest source of tax receipt after housing and real estate.

Since the transfer or sale of shares often leads to the profit of individuals, dividends can also be subject to this law. Transparency in stock trading has made it very easy to calculate and receive tax on stock earnings. There are different opinions about the tax on stock earnings, and some believe that receiving this type of tax will destroy people’s desire to invest in the stock market, and as a result, problems will arise for companies active in the stock market. For this reason, the amount of tax on share income and how to receive it is different in different countries of the world.

Income tax in Iran

Receiving tax on share income was among the clauses that were included in the initial draft of the capital income tax law. In a television interview in support of this law, one of the members of the Economic Commission of the Islamic Parliament stated that the tax on capital gains does not include the profit from the sale of shares and is only paid to the dividends paid by the company to the shareholders. The representative said that the purpose of this plan is to encourage companies to “increase capital” instead of “sharing profits among shareholders”, which will ultimately lead to an increase in production.

Nevertheless, the plan of tax on share income was met with objections and criticisms from the members of the parliament and finally it was rejected by creating an amendment.

Which assets are exempt from capital gains tax?

According to the latest capital gains tax plan, the following are exempt from tax:

• Residential property belonging to non-commercial persons over 18 years of age, which has been owned by the person for more than 2 years and no other residential property belongs to him. Every natural person can enjoy a tax exemption for up to 4 residential properties with a minimum ownership period of 2 years for the number of his spouse and children over 18 years of age who do not have residential property. The condition of enjoying this exemption is that during the last 5 years, the non-commercial person and his family members have not used this exemption.
• A vehicle belonging to a non-commercial person over 18 years of age, which has been owned by a person for more than 2 years and no other vehicle belongs to him.
• The first transfer of properties after obtaining the certificate of completion or properties that have a construction permit but do not have a certificate of completion and at most 4 years have passed since the date of obtaining their construction permit.
• Transfers that are in the form of inheritance or will.
• Selling 200 grams of 18 carat gold for any non-commercial person over 18 years old; Provided that he has not used this exemption in the last 5 years.
• The transfer of gardens and agricultural lands outside the city limits, with the exception of the gardens of villas, provided that it has been in the possession of a person for at least 3 years and under cultivation.
• Movable and immovable assets that are transferred in the form of dowry or dowry.
• Currencies imported from abroad and approved by the Central Bank.

How to calculate capital gains tax

As we said, capital gains tax is applied to the profit from the sale of valuable and non-productive assets. The amount of capital gains tax is usually considered as a percentage of the profit from the sale of assets.

The method of calculating capital gains tax is different in the countries of the world and can change in different situations according to the economic conditions. Usually, if the profit from the sale is up to a certain level, it is exempt from tax and as the profit increases, the income tax will also increase.

Denmark has the highest tax rate on capital gains with a tax rate of 42%. America and England are ranked fifth and sixth, respectively, with a rate of about 28%.

In the latest capital gains tax plan presented, the method of calculating the capital gains tax rate is as follows:

• The real estate income tax rate is 40%, except for waste land with a tenure of less than one year. After each year, 3 units are reduced from the mentioned rate. From the twelfth year, the tax on capital gains is determined at a rate of 4%.
• The tax rate on the income of a car with an ownership period of less than one year is considered to be 30%. After each year, 10 units are reduced from the mentioned rate. It will be tax free from the fourth year onwards.
• The tax rate on the income of assets such as gold, jewelry and all kinds of foreign currencies, with the acquisition period of less than one year, is considered 30%. By keeping these assets for more than one to two years, this rate changes to 20%. From the third year onwards, the capital gains tax rate is set at 10%.

Examples of how to calculate capital gains tax

First example:

Suppose you bought a residential property for one billion tomans and after three years, the price of your property has reached 3 billion tomans. Therefore, your income from the sale of this property will be equivalent to 2 billion Tomans. Because this property has been in your possession for three years, the tax rate on your housing income is 34%; As a result, you have to pay 68 million Tomans of capital gains tax.

Second example:

Suppose you buy a car at a price of 70 million tomans and sell it after a year when the price of your car reaches 100 million tomans. In this case, your income from the sale of the car is equivalent to 30 million Tomans. Since the car has been in your possession for a year, the tax rate on your car income will be 30%; That means you have to pay 9 million tomans of capital gains tax.

How to pay tax on capital gains

Currently, only the general principles of the capital gains tax plan have been approved and the amount of tax has been determined based on these general principles. However, a specific method for paying capital gains tax has not yet been proposed. Probably, after the final approval of the income tax law and the details of this plan are clarified, taxpayers can view their tax file inquiry through the website of the country’s tax affairs organization and pay taxes by filling out the tax return.

Capital loss tax

The question may be raised for many people, what is the duty of capital gains tax in case of loss? In response to this question, we must say that capital gains tax is generally calculated; That is, for example, if you made a profit of 500 million tomans from one transaction and lost 200 million tomans from another transaction, you must pay tax on your total profit, which is equal to 200 million tomans.

On the other hand, if you lose in all your transactions in a period of time, the amount of your loss will be included in your tax account and will be deducted from the profit of your next period. In fact, you will have the same amount of tax exemption in the next period.

The time of implementation of the capital gains tax law

According to the head of the country’s education, research and tax planning center, many of the legal deadlines in the capital gains tax plan are six months; This means that the law has only six months to approve the executive regulations of this project.

However, according to the eighth article of this plan and in order to provide preparations by other institutions, after the effective date of this article, there is a maximum of 20 months to complete the databases subject to the article. Therefore, this process may take up to 20 months or may be implemented earlier.

Conclusion

Capital gains tax is a type of direct tax that often targets the prosperous and wealthy class of society, usually through unproductive activities that result from speculation. Therefore, all people who earn profits through non-productive activities will not be subject to this tax. The government has decided to minimize the speculation in the markets through this plan and thus prevent the inflammation of the markets. As a result, by balancing the market, prices grow in a real and rational way, and people are encouraged to minimize their tax payments by investing in productive activities and the production sector. Finally, this project will bring prosperity in the production sector. We hope that this will be achieved with the implementation of the capital gains tax plan.