about Capital Gains
Details about Capital Gains.Who wouldn’t like to see their assets growing on a regular basis? As much as we enjoy seeing our assets swell up, there is a different side to it that we must deal with, capital gains. A capital gain is a type of tax than an investor has to pay if he/she sells his/her assets at a higher value than what they had purchased the same for. It must be noted, that if you as an investor are holding on to assets and their net value increases, you are not liable to pay any capital gains.
It only comes into picture when you sell the same. For an example, you could hold on to stocks of your favorite company. The value of the stocks would appreciate year over year, but you do now owe any capital gains tax unless you sell those stocks. Anyone who sells their assets for a profit would come under the purview of the capital gains tax unless an individual does it for a living. The simplest example would be that of a day trader. They indulge in the selling of stocks on a daily basis when then gain a certain amount. For them, the gains are calculated under the head of business income.
The tax rates when it comes to capital gains are primarily split as short-term or long-term. As the names suggest, these primarily depend on how long you are holding the assets along with you.
Any profits that you accumulate within a short span of time will be calculated under the normal income tax rates.
However, if you hold on to assets for more than a year, the tax rates come down significantly. In fact, some individuals might even qualify for 0% tax rates for holding assets for more than a year. We will take a couple of examples and see how the tax rates come into the picture.
When it comes to single filers, taxpayers who qualify for the 10% and 15% tax bracket are not liable to pay any capital gains tax when it comes to long-term gains. Short-term gains are taxed at the same rates as income tax for people in the 10-15% brackets.
When the tax bracket for income increases, so do the short-term and long-term capital gains. For people in the 25-35% bracket of income tax, the short-term capital gain remains the same.
However, the long-term capital gain is set at 15%. Similarly, individuals taking home in excess of $418,401 a year are taxed at 39.6% for short-term gains, while the long term-gains remain at 20%.
The capital gains tax on short-term gains remains the same as income tax, irrespective of your status while tax filing. Similarly, irrespective of whether you are married filing jointly, married filing separately or are head of household, the long-term capital gains remain the at 15% for people coming in the 25-35% tax bracket and 20% for people who come under the 39.6% income tax rate slab.
The capital gains tax system comes into the picture primarily for assets such as real estate, bonds, and stocks. It is usually not applicable to cars, boats and other similar stuff. When you sell these eligible assets and make money off it, is labeled as capital gains. Any loss you make also qualifies as a capital loss and can be used to check the profits.
For an instance, if you sold stocks of a company with a profit of $2000 and sold another stock at a loss of $400, your net capital gains will be valid on $1600.
If you someone who regularly buys and sells the above assets, it is worth spending some time on understanding your capital gains liability.