Capital Gains Taxation in Kenya
In Kenya, capital gains are subject to taxation under the Income Tax Act (ITA), Chapter 470 of the Laws of Kenya. The ITA defines capital gains as the profit or gain realized from the disposal of a capital asset. Capital assets include:
- Real estate properties
- Stocks and shares
- Bonds and debentures
- Business assets
The disposal of a capital asset can be through sale, exchange, or gift.
Calculation of Taxable Capital Gains
Taxable capital gains are calculated as the difference between the selling price of the asset and its acquisition cost. The acquisition cost includes the purchase price, any expenses incurred in acquiring the asset, and any improvements made to the asset during ownership.
Adjustments or deductions may be allowed in the calculation of the gain, including expenses related to the sale (e.g., brokerage fees, legal fees) and any improvements made to the asset during ownership.
Tax Rates
Capital gains are taxed at a flat rate of 5%. However, certain capital gains may be exempt from taxation, such as gains from the disposal of a principal private residence.
Legal Framework
The taxation of capital gains in Kenya is governed by the following articles of the ITA:
- Section 2(1): Defines capital gains as the profit or gain realized from the disposal of a capital asset.
- Section 15(1): Specifies that capital gains are taxable as income.
- Section 15(2): Provides for the calculation of taxable capital gains.
- Section 15(3): Sets the tax rate for capital gains at 5%.
- Section 15(4): Exempts certain capital gains from taxation, such as gains from the disposal of a principal private residence.
Policy Objectives
The taxation of capital gains in Kenya aims to:
- Generate revenue for the government.
- Ensure that individuals and businesses contribute their fair share of tax on profits realized from investments and asset disposals.
- Promote investment and economic growth by providing incentives for capital formation.
Conclusion
The capital gains tax system in Kenya is designed to be fair and equitable, while also encouraging investment and economic growth. By understanding the rules and regulations governing capital gains taxation, taxpayers can accurately calculate their tax liability and fulfill their tax obligations.
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