Capital Gains Tax

Overview

The profits from certain non-inventory assets are subject to a capital gains tax. The difference between the purchase price and the selling price of an asset is called a gain. Taxable gains include stocks, bonds, precious metals, and property. Capital gains taxes vary by region, and tax rates are different for businesses and consumers.

How It Works

Capital gains are usually taxed at different rates, depending on how long the assets were held in ownership. When an asset is held for a longer time, the rate is lower. If the same assets were sold before the period prescribed by law, the rates would be relatively higher. The current laws and the changes that the government brings about in the laws for economic stimulus determine the rates and the rate of tax charged. For the sale of an asset to be taxed as a long-term gain, it must be held for one year before being sold. If the asset is sold before one year is up, the gains are charged at normal income tax rates.

Sometimes, rates will change automatically depending on legislation and reductions. To extend these lower rates for any period of time longer than negotiated, a particular tax bill requires an amendment and vote in Congress again as well as a signature from the President. Each year, this tax legislation issue is under debate.

Benefits

A preferential rate is charged for capital gains over personal or corporate income. The incentive of capital gain is intended for those investors who make capital investments for the growth of the economy. Capital gains also help fund entrepreneurs in their activities to create jobs in small businesses. The tax rates charged vary depending on their tax bracket and the time period for which investment was held before it was sold.

Cost/Pricing

There are some provisions under certain considerations for delaying capital gains taxes. The IRS allows deferments and tax planning strategies that include the structured sale (ensured installment sale), charitable trust (CRT), installment sale, private annuity trust, and 1031 exchange.

Timing

Capital gains taxes are paid in conjunction with normal income taxes. As with income taxes, capital gains taxes may be withheld in increments over a period of time.

Companies/Industries

Corporate tax advisers can assist help businesses plan their capital gains taxes. A certified public accountant (CPA) can normally help in evaluating the tax implications of certain decisions.