In Nepal, both the number of Community Forest User Groups (CFUGs) and the area of community forests are increasing every year, and the condition of these forests is significantly improving. In this context, community forests, if managed on an equitable and sustainable basis, can not only satisfy some of the basic needs of user groups, but will also provide substantial socio-economic and environmental benefits to the CFUGs and the nation as a whole. Nevertheless, community forestry in Nepal will not be sustainable unless the government, civil societies and the business sectors jointly pay adequate attention to its policy implications for equitable cost and benefit sharing within and outside CFUGs. This paper presents an analysis of the government's forest policies and its implications for identification, quantification, valuation and equitable sharing of costs and benefits in community forestry in Nepal.