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What Is The Capital Gains Tax?
What is the capital gains tax and how might you be affected by it? A capital gains tax is the tax that is paid when you make a profit on a capital investment. The profit is known as capital gain. If there is a loss between the amount that is paid on an investment and the amount that is received when the investment is sold, then it is referred to as a capital loss.
A capital investment is the purchase of a capital asset which could include such items as mutual funds, stocks, bonds, precious metals, real estate, fine art, coins and other types of collectibles. The profit that is earned on the sale of any of these items can trigger a capital gains tax. Items which are not considered to be capital assets include dividends, interest and wages. Those items are considered to be ordinary income.
It is important to keep track of all investments made in order to calculate the potential capital gains tax. In order to calculate the capital gains tax, the taxpayer must know what was purchased and how much was invested at the time of the purchase. Other information needed to calculate the capital gains and capital gains tax includes all brokerage fees and commissions as well as the date of the purchase. The sale date must also be known as well as the sales price and any fees that were paid at the time of the sale.
There is a simple formula for calculating the capital gains tax. Begin by taking the sales price and deducting any commissions and fees. Then deduct any buying fees and commissions and subtract the purchase price. This will leave the profit amount or the loss amount. The final capital gains tax will be based upon the amount of the capital gain as well as the type of capital asset which was invested in and the length of time that the asset was held. The length of time for which the asset was held can make a big difference on the amount of the capital gains tax. If the holding period was one year or less then it is referred to as a short term capital gain and is subject to regular income tax rates. If the period was for longer than one year, then it is taxed at long term capital gains tax rates. The exact amount will depend on your tax bracket.
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