What is the main implication of transactions not being made at arm's length for capital gains tax?

In situations where transactions are not conducted at arm's length, the main implication for capital gains tax is that these transactions may be assessed based on their market value rather than the actual transaction price. This is important because arm's-length transactions are those where buyers and sellers act independently and have no relationship to each other, reflecting a fair market value.

When a transaction is not at arm's length, it raises concerns about whether the price reflects true market conditions. Tax authorities often seek to ensure that any gains realized from the sale of assets are accurately represented, and to prevent manipulation of prices to reduce tax liability. Consequently, the tax implications are adjusted so that if a transaction occurs between related parties (for example, family members or business partners), the tax authority can assign a market value to the transaction, ensuring that taxes owed on capital gains are based on fair market assessments rather than possibly distorted values that do not reflect actual economic conditions.