Capital Gains Tax May Affect Your Stock Trading Returns: How to Minimise its Effects When Filing

At the beginning of 2023, the Kenya Revenue Authority (KRA) started collecting higher capital gains tax. Prior to the General Elections last August 9, 2022, the Parliament approved tripling the tax resulting from the gains of properties and shares from 5% to 15%. This was done in an effort to dampen property sales in 2023 amid increasing land prices in Nairobi.

However, this tripled capital gains tax affects more than just real estate. Stock traders can expect it to impact their returns, too. After all, shares are considered assets and investments under capital gains tax. To know more about how this will affect your stock trading returns and how you can minimise its effects when filing, keep reading below:

What is Capital Gains Tax (CGT)?

According to the Kenya Revenue Authority, capital gains tax (CGT) is imposed on a person’s profits acquired from selling or transferring properties within the country. It is a final tax, meaning the seller won’t be subject to additional taxation after paying this.

CGT is computed by subtracting the cost of your assets (including expenses related to its sale, such as construction and legal fees) from its sale price. The result is subjected to a 15% rate of taxes. The same computation applies to stocks and market shares.

How does CGT affect stock trading returns?

By paying CGT, you’ll get a smaller return from your stock trading gains, especially since the rate was increased to 15%. If you’re using your profit from stock trading to fund investments or pay some of your living expenses, it will take you a while before you can save a significant amount of money.

Additionally, late payment of CGT subjects you to penalties. The penalty is KSh 2,000/= per year not filed. This is why it’s essential to pay CGT on or before June 30 yearly. You can check your penalties using the KRA Portal (also called the iTax Portal) online. Make sure you know your KRA PIN Number and KRA Password (iTax Password) to log in.

Tips to minimise the effect of capital gains tax on stock trading returns

Consider long-term trading

When you quickly trade stocks in the short term, you’ll have multiple gains in a year that you’ll have to file CGT and pay the 15% rate for. When you trade long-term, you’ll only profit after months or years. Because of this, you’ll seldom have to file CGT, minimising the effects of this tax on your stock trading returns. So, consider long-term trading. Start by picking stocks that will need years to generate significant profit and using long-term trading strategies, like value investing.

Trade indices instead of stocks

Apart from trading for the long term, consider investing in indices instead of individual stocks. Since each stock you transact with will cost you a 15% tax, trading indices can be more cost-effective because they involve transacting with a group of stocks at one time. With the right trading platform, you can also trade with fewer transaction fees and expenses, allowing you to further maximize returns that filing CGT would otherwise take away from. You’ll ultimately seldom pay CGT and benefit more from your trading efforts.

Utilise capital losses to offset your gains

Although you view capital losses negatively, you can use these to offset your gains and pay lower CGT. Let’s say you own two stocks. One costs 15% more than you originally paid for, while the other is worth 10% less. If you sell both assets, your loss on the latter will reduce the CGT you’ll pay for the other.

This is one way to take advantage of capital losses, especially when stock market returns are low. Back in March 2022, for example, the Nairobi Stock Exchange was only earning average annual returns of 12%. While this is unfortunate news for traders, you can turn it around by utilising capital losses.

Though filing CGT is a must for stock traders, you can use these tips to minimize its effects on your returns. Remember to pay for it on time, too, to prevent penalties.