Taxing capital gains

This paper examines OECD countries’ experiences in taxing capital gains, analysing the rationales, challenges, and implications of offering more favourable tax treatment to capital gains compared to other forms of income. Most OECD countries tax capital gains upon realisation, usually at lower rates or with exemptions, and often offer additional relief for specific assets such as housing or closely-held businesses. While some arguments for favourable capital gains tax treatment – such as compensating individuals for double taxation or the taxation of inflationary gains – present a stronger case, evidence supporting other justifications, such as promoting investment and entrepreneurship, remains mixed. In practice, current capital gains tax systems often undermine equity, introduce economic distortions, and constrain revenue-raising potential. Alternative approaches, including targeted relief measures and adjustments to the realisation basis of taxation, can address some of these challenges but require careful evaluation of their trade-offs. This paper lays the groundwork for evaluating potential policy reforms.