Understanding Capital Gain

What is a Capital Gain?

A capital gain is a profit that is realized from the investment into a capital asset (such as bonds, stocks, or real estate). A profit is realized in an investment when the return on the investment exceeds the purchase price (the price paid for the investment) of the particular asset or security purchased. As a result, a capital gain is the difference between higher selling price and a lower purchasing price, which subsequently results in a realized gain for the investing party. In contrast, a capital loss will arise if the proceeds from the sale of a capital investment or asset is less than the purchasing price.

A capital gain is commonly referred to as “investment income” that will arise in relation to the prices of real assets such as property, equity investments such as stocks or bonds, and intangible assets such as goodwill.

The majority of countries, including the United States, will impose a tax on capital gains that is placed on both individuals and corporations who are awarded a profit through their particular investments. Depending on the tax policy of the particular government, forms of relief may be made available to those that invest in the aforementioned assets. Relief on a capital gain is awarded in relation to holdings in certain assets, such as common stocks, to help encourage investment and entrepreneurship or to compensate for the negative effects of inflation.

Capital Gains Tax:

The capital gains tax is implemented on any capital asset that generates a real profit, either following the sale of the asset or through any means that generates increased value, such as in the way of interest. The amount of capital gains tax implemented is based on the increase in the net worth of the underlying asset.

The most common capital gains taxes are placed on the sale of stocks, property, bonds, and property. Not all developed nations implement this form of taxation and the ones that do levy the capital gains tax will impose different rates of taxation for corporations and individuals.

For the sale of equities that generate a profit, the corresponding national or state legislation will institute an array of fiscal obligations that must be adhered to regarding one’s capital gains.

In the United States, all individual and corporate tax payers will pay income tax on the net total of all their capital gains just as they would on any sort of income earned. That being said, the tax percentage is lower on long-term capital gains, which are profits realized on the sale of assets that have been held for over one year following the sale.

The tax rate on long-term capital gains was reduced in 2003 to 15% or 5% for individuals in the lowest two income tax brackets. In contrast, short-term capital gains possess higher tax rates; these forms of gains are typically taxed as ordinary income.

The Internal Revenue Service allows individual to defer their capital gains taxes with tax planning strategies (primarily structured sales) such as charitable trusts, private annuity trusts, installment sales, and a 1031 exchange.

The United States taxation model is unique in regards to capital gains tax because the country will levy a tax on worldwide income; the tax is placed on income no matter where in the world the individual resides.

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