Capital Gains Tax
Explanation: Capital gains tax is a tax on the profit realized from the sale of a non-inventory asset, such as stocks, bonds, real estate, and precious metals. The tax is only applicable when the asset is sold, not while it is held. Capital gains are classified as short-term (held for one year or less) or long-term (held for more than one year), with long-term gains typically taxed at a lower rate.
Example: If an investor buys shares for $1,000 and sells them for $1,500, the capital gain is $500. Depending on the holding period and tax regulations, this gain may be subject to capital gains tax. For example, if the shares were held for more than a year, the tax rate might be 15%, resulting in a tax of $75 on the $500 gain.
Reference Link: For more information on capital gains tax, visit Investopedia’s Capital Gains Tax.
FAQs:
- What is the difference between short-term and long-term capital gains tax?
- Short-term gains are taxed at ordinary income tax rates, while long-term gains are taxed at reduced rates, typically 0%, 15%, or 20%, depending on income.
- How can I minimize capital gains tax?
- Strategies include holding investments for more than a year to qualify for lower long-term rates, tax-loss harvesting, and utilizing tax-advantaged accounts like IRAs.
- Are there any exemptions from capital gains tax?
- Yes, primary residences and certain small business stocks may qualify for exemptions or reduced rates.
- Do I have to pay capital gains tax on inherited assets?
- Inherited assets typically receive a “step-up” in basis to their market value at the time of the original owner’s death, potentially reducing capital gains tax when sold.
- Is capital gains tax applicable to all types of assets?
- No, it generally applies to investments and property, not ordinary income items like wages or interest.