Accrual based taxation
An accrual based capital gains tax taxes the gain in an asset’s value over a certain period, with the tax payable at the end of this period (typically annually). Under accrual taxation, the tax liability arises regardless of whether the asset is disposed of. Declines in an asset’s value would be treated as a deductible loss and immediately offset against other income or carried forward. There are both positive and negative aspects to accrual based capital gains taxation.
The key advantages of accrual-based taxation include:
- a substantial increase in average tax revenues;
- an increase in the overall progressivity of the income tax; and
- neutrality with respect to investment decisions if applied to all assets at the same rate as other forms of income.
The key disadvantages of accrual-based taxation include:
- the creation of liquidity problems for shareholders and other capital holders who accrue substantial gains without realising cash;
- problems with the regular valuation of assets; and
- greater revenue volatility for the government due to market fluctuations.
Realisation based taxation
In reality, no country has accrual-based capital gains tax, despite its efficiency advantages. Instead, most countries follow a realisation-based capital gains tax. This tax taxes the gain in an asset’s value when that asset is sold.
The key advantages of realisation-based taxation include:
- ability of taxpayers to fund the tax liability;
- existence of a sale price for determining the gain or loss;
- relative simplicity of the concept for taxpayers; and
- relatively lower revenue volatility than a tax on accrual basis.
The key disadvantages of realisation-based taxation include:
- incentives to defer the sale of appreciating assets and bring forward the sale of depreciating assets; and
- the need to ring fence capital losses to prevent sheltering of ordinary income.
As mentioned above, when to implement the CGT is only the first part of the question. Having decided which type of tax to implement, several design questions begin to emerge. Based on research, 5 key issues have been isolated, considered and analysed, based on the Australian example. These are summarised in box 2. 
Box 2: Design issues for the implementation of a capital gains tax.
 Accumulated from: Leonard E. Burman and David I. White, “Taxing Capital Gains in New Zealand: Assessment and Recommendations,” http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-taxing-capital-gains-burman_white.pdf (accessed 25 August, 2011), 17; Inland Revenue Department and New Zealand Treasury, “The Taxation of Capital Gains Background Paper for Session 3 of the Victoria University of Wellington Tax Working Group,” 4; BERL, “Headline Estimates of Fiscal Revenue from Capital Gains Tax,” http://www.ownourfuture.co.nz/static/assets/BERL%20report.pdf (accessed 28 August, 2011).
 Accumulated from: Leonard E. Burman and David I. White, “Taxing Capital Gains in New Zealand: Assessment and Recommendations,”17; Inland Revenue Department and New Zealand Treasury, “The Taxation of Capital Gains Background Paper for Session 3 of the Victoria University of Wellington Tax Working Group,” 4; BERL, “Headline Estimates of Fiscal Revenue from Capital Gains Tax.”