The Capital Gains Tax Debate

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A debate is currently raging in the market over the recently imposed Capital Gains Tax (CGT) on the Nigerian stock market. Set to take effect in 2026 as part of the new Tax Act, many argue the tax is unwarranted at this time.

I have reviewed an elegant Question and Answer document published by the Presidential Committee on Tax, which explains the CGT and how it will work. The document suggests this is not a great burden, that everything will be fine, and that even affected foreign investors can claim tax refunds from their home countries.  I don’t dispute all they have said. However, I have a totally different take on the issue: 

If it isn’t broken, why fix it?

For more than a decade, the 10% CGT on the Nigerian stock market, initially imposed in 1998, was suspended to encourage market growth. 

Has that objective been achieved?

The Nigerian Stock market capitalization is only about $67 billion today. For comparison, the Johannesburg Stock Exchange is currently valued at $1.63 trillion.  We clearly have a long way to go. It is also important to remember that the stock market will be essential for raising capital to achieve the $1 trillion economy Nigeria seeks by 2030. Historically, the stock market has been the easiest way to attract dollar investments and help stabilize the Naira. Yes, Foreign Portfolio Investments (FPIs) are what we call “hot money.” They can vanish as quickly as they arrive because they seek yields, unavailable elsewhere. However, they will stay if given a reason to remain; capital stays where it is welcomed. We need FPIs to stay a little longer while we fix other areas of the economy. If we push them away now, the anticipated tax benefits will never be realized.

The Sudden Rate Hike and Market Impact.

We have also seen the tax rate jump from the original 10% to 30%. The optics of this sudden change are poor. Moreover, it is an unfair treatment of long-term foreign investors who entered this market years ago. These investors hoped to make decent gains and did not factor this sudden CGT, into their analysis. Consequently, these investors may have no reason to keep their investments here beyond the end of the year. The resulting dislocation from their exit will strain the market and may derail the CBN’s plans. 

A mass exit of foreign investors typically puts pressure on our dollar reserves, which we must avoid now. This new tax will unquestionably discourage investors, especially FPIs. According to ThisDay, some analysts believe the Financial Times may remove Nigeria from its Frontier Market Index if we proceed with this tax. While we should ignore their blackmail—as they cannot dictate our domestic policies—it is unfortunate that these are the people who communicate with those who invest in our markets. We are seeing a sudden return of Foreign investors in our market in the last 9 months. They are seeing the reforms and applauding it. This is not the time to give them cause to rethink their support for our economy. 

All I am saying is that, we must be careful not to trigger unintended consequences. We are already seeing some sell offs, in the market.  Stock market gains from 2024 and the first half of 2025 are now slightly trending down. Since the new tax begins in 2026, we expect many more investors with capital gains liabilities may exit the market before the year-end to avoid being caught by it.

Defer This Tax on the Stock Market

While there is a genuine need to raise revenues to fund the government and capital projects, we must do so with tact. We must avoid throwing the baby out with the bathwater. The new Tax Act overall is a good law and identifies all revenue sources to be captured. However, there is no need to implement every part, immediately. The document is already law; the strategy should be to implement it in the most effective way.

Earlier last month, the government had to suspend the 5% petrol tax aspect of this same Tax Law, due to public pushback. Incidentally, that petrol tax is not new. The tax and the establishment of the Petroleum Trust Fund (PTF) were first put in place by General Sani Abacha, and former President Mohammadu Buhari was appointed as chairman. The PTF was created to be funded by revenue from the increase in petrol prices and was intended to develop transport infrastructure to cushion the hardships from the price hike. Unfortunately, the PTF ended up funding everything, except transport infrastructure, save for a few buses; the money was wasted. You cannot point to any legacy project of the PTF today. Imagine if the Fund had been directed toward railway build-out throughout the country or used to develop the East-West Road. Instead, it became an intervention fund for everything and ended up funding items already provided for in the budget, including building community centers—a complete diversion from the original purpose.

This Capital Gains Tax, should also be deferred until a more appropriate time. In a democracy, being sensitive to public demand is a strength, not a weakness. Any sincere government can make mistakes; correcting them strengthens the bond with the public. This is another opportunity for the government to show its sincerity of purpose.

Ironically, the tax revenues from this new levy will not amount to much. The attempt to minimize the impact on retail investors, by limiting the CGT threshold of N150 million and a one-time gain of N10 million, clearly indicates the constraints in implementing this new Tax. The majority of Stock market participants today, are retail investors, currently over 60% of participants. This means the receipts from this Tax, will be very small and insignificant. 

Furthermore, the large institutional investors who would pay this tax, have all the tax avoidance schemes to reduce their payments. The possibility of realizing little from the tax is very real. The likely negative impact does not justify this tax. My view is that it should be deferred for now. Let’s focus on the low hanging fruits elsewhere.

The Laffer Curve Vindication.

In 1978, Professor Arthur Laffer of the University of Southern California, popularized the idea that lower tax rates allow for higher compliance and therefore more tax revenues for the government.  This concept fueled a tax revolt in California, known as Proposition 13, which passed as a referendum. The subsequent result was that more tax revenues came from flattening tax rates. We should learn from this.

Our focus now should be on compliance—getting more people to pay their existing taxes—not on increasing the tax burden. If collected diligently, the taxes we already have, will more than provide the revenues we need.  Let’s recognize that lower taxes, aid economic expansion, and high tax rates, are counterproductive to growth.

Victor Ogiemwonyi, a retired investment banker, writes from Ikoyi, Lagos.