Nigeria has taken bold steps to stabilise its fragile economy. Floating the naira, scrapping fuel subsidies, and tightening monetary policy were unpopular but necessary. These measures stopped the bleeding, much like a doctor stabilising a patient in crisis. Yet stabilisation is not recovery. For Nigeria to move from survival to growth, the country must ignite an investment cycle. That requires lowering the cost of capital, not raising it. Unfortunately, the new capital gains tax (CGT) regime risks doing the opposite. With its ambiguities, retroactive application, and punitive rates, the law could choke investment just as the economy needs it most.
Ambiguity and Investor Friction
The first problem is ambiguity. Equity investors are told they can defer capital gains taxes if they reinvest in “equivalent securities.” But what qualifies as equivalent? The same share class, an ETF, or a global depository receipt? Does the rule apply to public and private equities? What is the reinvestment timeframe?
The lack of clarity creates friction. Investors cannot use money market or fixed income instruments as temporary parking options when reinvesting. For large investors, this is a practical challenge because equity market liquidity is limited. While waiting to reinvest, cash is often deployed into these instruments. If reinvestments trigger unintended taxes, liquidity could shrink further in a market that already struggles with depth.
Foreign investors face even tougher conditions. Nigeria is trying to pull them into its tax net despite the fact that many already pay in their home jurisdictions. Nigeria’s limited double taxation treaty (DTT) network makes this worse. Out of 193 countries worldwide, Nigeria has active DTTs with just 16. None include the United States, the world’s largest capital market. The result is that foreign investors could face far higher effective tax rates than in comparable markets, reducing Nigeria’s attractiveness for badly needed capital inflows.
Retroactive Taxation and Fairness
Another major flaw lies in fairness. The regime uses historic cost to calculate liabilities, meaning investors could be taxed on gains made years before the law came into effect. This retroactive application erodes trust. Other countries avoided this mistake. South Africa in 2001 and India in 2018 reset their cost bases to market values at the time of implementation, ensuring only future gains were taxed. Nigeria should adopt the same approach.
Consider an investor who bought shares at N10 in 2019. By 2026, when CGT begins, the stock trades at N30. If sold at N36 in 2026, Nigeria would tax N26 of gains, even though N20 was made before the policy. This kind of retroactive taxation undermines credibility and contradicts the principle of fairness.
Risk of Pre-Emptive Selling
Local investors may also try to avoid the regime by selling early. This defensive selling would likely depress valuations in the short term. Ironically, it would do so just as Nigeria’s improving macroeconomic outlook should be lifting valuations. Instead of building confidence, the tax could trigger instability and price weakness.
Too High, Too Soon
Most countries expand CGT regimes gradually and often cut rates to encourage compliance. Nigeria has chosen the opposite route. With a rate of up to 30 percent (25 percent after FEC approval), Nigeria’s CGT is high compared to peers. Kenya charges zero percent on listed securities, Ghana 15 percent, South Africa around 18 to 22 percent, and Vietnam 20 percent.
In a volatile economy prone to inflation and currency devaluation, using historic naira costs makes the effective burden even higher in real terms. This could push Nigeria’s rates well above 30 percent in practice, discouraging equity participation.
Adding Frictions, Deterring Inflows
Nigeria’s equity market already suffers from high trading frictions. Round-trip fees can reach 1.5 percent, placing the market among the more expensive in its peer group. By introducing what is effectively an exit tax, Nigeria risks scaring away foreign investors.
The timing is particularly unfortunate. Improvements in currency convertibility had positioned Nigeria for possible re-entry into global indices such as MSCI and FTSE. Inclusion in these indices could have driven billions of dollars in passive inflows. Instead, this policy will likely deter index providers, reduce liquidity, and ultimately raise the cost of equity for Nigerian companies.
The Cost of Capital and Growth
Investment cycles begin when the cost of capital falls. Lower costs encourage companies to raise equity, finance projects, and expand. Higher costs deter them. If uncertainty surrounding CGT raises investor return expectations, Nigeria risks stalling its investment cycle before it even starts. This could undermine the reform gains already achieved and threaten the government’s $1 trillion GDP target.
A Better Way Forward
Nigeria should not scrap capital gains tax, but it must refine its design. A few clear actions can change the trajectory:
- Clearly define “equivalent securities” for equities.
- Allow temporary use of equity proceeds in money market and fixed income instruments within a defined window without triggering CGT.
- Reset cost bases to market values at implementation to avoid retroactivity.
- Moderate rates to align with peers and encourage compliance.
- Suspend CGT for foreign investors with Certificate of Capital Importation until treaty coverage improves.
Stabilisation has bought Nigeria valuable breathing room. But recovery requires more than patchwork fixes. Without clarity, fairness, and investor confidence, Nigeria risks halting growth before it begins.
