The government is proposing significant changes to the taxation of share market investors as part of its broader capital market reform plan.

The proposed reforms would reduce capital gains tax rates on profits earned by individual investors from the sale of listed shares and introduce a system under which tax would be calculated on overall net gains after adjusting eligible losses.

Lower tax rates for share investors

Under the proposed arrangement, individuals holding listed shares for more than 365 days would pay a 3.75% capital gains tax on profits from their sale, down from the current 7.5%.

For shares held for 365 days or less, the proposed rate would be reduced to 5% from the current 10%.

The government says the changes are intended to reduce the tax burden on investors while encouraging greater participation and, particularly, longer-term investment in the capital market.

Losses could be adjusted against gains

A major proposed change is the introduction of a loss-adjustment mechanism for share transactions.

If an investor makes a profit from selling one listed security but incurs a loss from another eligible transaction during the same income year, the loss would be allowed to offset the profit.

The government plans to improve the existing capital gains tax calculation system so that profits and losses can be adjusted through the transaction and settlement system.

After all eligible gains and losses are consolidated, capital gains tax would be imposed only when the investor has an overall net profit.

For example, an investor could make a profit on one share sale but suffer a larger loss on another during the same income year. Under the proposed system, tax would not be calculated separately on the profitable transaction. Instead, the overall net result would determine whether capital gains tax is payable.

Capital gains tax as final tax

The action plan also proposes recognizing capital gains tax paid by individual investors as a final tax. This could simplify the tax treatment of share-market gains for natural persons and provide greater clarity for investors.

The proposed mechanism is aimed at addressing the current situation where losses from separate share transactions are not effectively reflected in capital gains tax calculations. Investors can therefore face tax on an individual profitable transaction even when their overall trading result for the year is a loss.

By allowing gains and losses to be adjusted, the proposed system would shift the basis of taxation toward an investor's overall net gain rather than individual profitable transactions.

Implementation still requires legal changes

The government expects the proposed reforms to make investment in Nepal's capital market more attractive by lowering tax costs and creating a more balanced method of calculating capital gains.

However, the proposed rates and loss-adjustment mechanism are not yet in effect. Relevant tax laws, regulations and transaction systems would need to be amended and updated before the changes can be implemented.