Economy

Understanding Capital Gains Tax and How It Affects Investors

1 day ago

What Is Capital Gains Tax?

Capital Gains Tax (CGT) is a levy imposed on the profit made from selling or transferring an asset that has appreciated in value.

The key principle is simple — the government taxes the gain, not the entire sale amount.

For example, if an investor buys shares for ₦1 million and later sells them for ₦1.5 million, the ₦500,000 profit is the capital gain. If the CGT rate is 10%, the tax payable would be ₦50,000.

CGT applies to several asset types, including:

  • Shares and securities

  • Real estate (land or buildings)

  • Business and investment assets

  • Certain intellectual property rights

Capital Gains Tax in Nigeria

In Nigeria, CGT is regulated under the Capital Gains Tax Act (CGTA). For decades, the standard rate stood at 10%, applying to both individuals and companies.

However, under President Bola Tinubu’s reform agenda, which began in 2023, the tax system was overhauled to improve fiscal discipline and increase non-oil revenue.

From January 2026, foreign equity investors selling Nigerian shares will be required to pay 30% Capital Gains Tax, unless they reinvest the proceeds into other listed or unlisted Nigerian equities.

The adjustment marks a threefold increase from the previous 10% rate and aims to:

  • Encourage reinvestment in Nigeria

  • Deter speculative short-term trading

  • Keep foreign capital circulating within the local market

Why the Federal Government Increased CGT

The government raised CGT as part of its broader drive to:

  1. Boost non-oil revenue and reduce the budget deficit

  2. Align with global tax practices that target capital income

  3. Promote fairness between local and foreign investors

Chairman of the Presidential Tax Reforms Committee, Taiwo Oyedele, defended the move, noting that investors can claim tax credits in their home countries where double taxation agreements (DTAs) exist.

“The country you pay capital gains tax is where you earn it from. When you go to your home country, they credit you,” Oyedele said.

Impact on Foreign and Domestic Investors

Raising the CGT to 30% increases the cost of investing in Nigerian equities for foreign investors, reducing after-tax returns.

Analysts warn it could trigger short-term market volatility as investors seek to realise profits before the new rate takes effect.

However, proponents argue it will make Nigeria’s market more stable and long-term focused, encouraging investors to reinvest rather than exit.

Tax specialists, including Russell Eastaugh, Africa tax lead at Regan van Rooy, caution that countries without DTAs with Nigeria could see reduced credit benefits, making Nigerian equities less attractive compared to other emerging markets.

Nigeria’s Stock Market Performance

Despite concerns, the Nigerian Exchange (NGX) remains one of the best-performing stock markets globally in 2025, delivering 39% naira returns and 47% dollar returns year-to-date.

Reforms such as fuel subsidy removal, foreign-exchange liberalisation, and Central Bank independence under Governor Olayemi Cardoso have improved macroeconomic stability, supporting the equity rally.

Yet, analysts including Kato Mukuru of Emerging & Frontier Capital warn that the CGT hike could place temporary pressure on valuations as investors rebalance their portfolios.

How CGT Works Globally

Capital Gains Tax rates differ by country:

  • United States: 0% – 20% depending on income and holding period

  • United Kingdom: 10% – 28%

  • South Africa: 18% – 36%

  • Nigeria: 10% for local investors, 30% for foreign investors on share disposals from 2026

Nigeria’s reform aligns with a global trend of tightening capital-income taxation to ensure fair contribution from international investors benefiting from domestic markets.

Bottom Line

Capital Gains Tax is a legitimate fiscal instrument used worldwide to generate public revenue and promote market fairness.

Nigeria’s decision to raise CGT on foreign stock investors from 10% to 30% is a bold fiscal reform designed to deepen revenue, strengthen the capital market, and reward investors who reinvest locally.

For investors, understanding the new regime is critical. Those planning to trade Nigerian equities should:

  • Review their portfolio strategies ahead of the 2026 implementation,

  • Consult tax professionals about double taxation relief, and

  • Explore reinvestment opportunities to optimise after-tax returns.

In the long term, success will depend on how effectively the government maintains policy consistency, market transparency, and macroeconomic stability to balance revenue growth with investor confidence.

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