What is capital gain?
The capital gain represents the increase in an asset’s value from the time you acquired it to the time you sold it. Profits from the sale of an asset such as a business, shares of stock, a piece of land are taxable income. A capital gain can be calculated when we subtract the original cost of an asset from the total sale price.
You may have wondered about different types of terms associated with finances and investment. Often you may have heard of gains in your capital. For this, we need to understand some basic concepts around capital gain. Firstly, we need to know what capital is. You may have different types of assets that you have accumulated over a period of time. This can be in prize bonds, cash, jewelry, property, land, and gold. There can be other forms of keeping your capital too. All of these are known as capital assets.
After a period of time, you may believe that these assets should be sold. You generally compare the price of selling and the price at which you bought your asset. There can be an excellent deal in which the price of selling would be higher than the price you bought. When you typically sell your possession at a higher price than that of buying, it means that you have achieved capital gain.
Taxes are an important factor that should be kept in mind before starting to sell a possession. You are, however, required to pay some amount of tax on the capital gain, and it depends on different factors, such as how long you have kept the possession. It is generally known that the taxes on the sold possessions are far higher than others; however, it may not be the case every time and can differ.
What is the capital gain tax?
Capital gain tax represents government fees on the profit made from selling assets. In the US, there are long-term gain tax and short-term gain tax.
There are two concepts known as long-term gain and short-term gain when we speak about capital gain. Both of these gains generally depend on how long you have kept the possession; in general, it is the period of time that determines it.
What is a long-term capital gain tax?
The long-term capital gain tax represents government fees from the sale of an asset held for more than a year. The long-term capital gains tax rate can be 0%, 15%, or 20%, depending on your taxable income and filing status. Usually, long-term capital gains tax rates are lower than short-term capital gains tax rates.
2021 Long-term capital gain tax rates are:
| Long-term capital gain tax rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 - $40,400 | $0 - $80,800 | $0 - $54,100 |
| 15% | $40,401 - $445,850 | $80,801 - $501,600 | $54,101 - $473,750 |
| 20% | $445,851+ | $501,601+ | $473,751+ |
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What is short-term capital gain tax?
The short-term capital gain or short sale tax represents government fees from the sale of an asset held for less than a year. The short-term capital gains tax rate can be 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on your taxable income and filing status.
2021 short-term capital gain tax rates are:
| Short-term capital gain tax rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 - $9,950 | $0 - $19,900 | $0 - $14,200 |
| 12% | $9,951 - $40,525 | $19,901 - $81,050 | $14,201 - $54,200 |
| 22% | $40,526 - $86,375 | $81,051 - $172,750 | $54,201 - $86,350 |
| 24% | $86,376 - $164,925 | $172,751 - $329,850 | $86,351 - $164,900 |
| 32% | $164,926 - $209,425 | $329,851 - $418,850 | $164,901 - $209,400 |
| 35% | $209,426 - $523,600 | $418,851 - $628,300 | $209,401 - $523,600 |
| 37% | $523,601+ | $628,301+ | $523,601+ |
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Capital gain facts:
• Capital gain means selling your possessions such as bonds, jewelry, gold, property, or any other asset at a higher price than the price you acquired.
• The taxes on the capital gain will be affected by the time period until you kept the possession with you. Depending on this, you will either get a short-term gain or a long-term gain. This is an important point, and this is the depending factor on how much tax will be applied on the possession and the gain that you get from it.
• Short-term gain occurs when you have kept the possession for a year or less than that. The tax that occurs on that is the normal one. There will be no additional tax applied on it, and it is ideal.
• Long term gain occurs when you have kept the possession for more than a year. The tax rate may vary from zero percent to twenty percent and in between.
Long term gain versus short term gain
When you sell the product or possession that you have held for a long time, it means you are likely to get on it again. This can be either a long-term gain or a short-term gain. This depends on different factors as to how long you have acquired the possession. If it is only under a year, then this means that you will acquire short-term gain, whereas if it is acquired for more than a year, then it means that you are likely to get a long-term gain. Short-term gains are not subjected to additional taxes, and the tax applied on it would be the normal one.
You are also required to calculate the net gain as well. This is basically the amount that it took you to buy the possession, the costs that were meant to maintain it, and how much you paid for the sale of the possession and cost. All of these factors contribute to the net gain calculation. If, however, the possession you got was a gift from someone, then the net gain is equal to the donor’s basis.
The taxes applied on the long-term gains are much favorable and lower than when the possession is only kept for a year or less. As a principle, you should keep the possession for more than a year and consequently add in more years so that you get a favorable long-term gain on your possession.
The taxes applied on the short-term capital gain are the regular ones. This means that generally, you may have to pay the tax a bit higher than the fact that if you would have held the possession for much longer years. All of this must be considered when you are weighing the opportunities made while selling the product. You can have a tax at a higher bracket than the amount for which you bought the possession. You must also understand that the tax rates will vary depending on the years, as the rate for each year differs depending on the country’s budget. The filing status is also considered when making a tax return; for example, are you filing as a single candidate, married, or married but filing separately.
Does location matter when you are filing for tax?
Apparently yes!
As other factors impinge on how much tax you are going to pay, one factor also includes where you are currently living. Some states do not put taxes on capital gains, whereas some states apply taxes on them.
States in the USA such as Florida, Texas, Washington, and others do not apply any taxes, whereas other states will apply taxes on the capital gain. Therefore, this must also be researched well before getting a capital gain.
Does the possession affect the capital gain?
Yes, the capital gain tax rates are different for different types of possessions:
• Jewellery/Art pieces: No matter which income slab you belong to, having possession of articles such as coins, stamps, jewelry, or even art pieces means that you will be taxed at around twenty-eight percent.
• Businesses: If you are an owner of a small or medium business, you should note that it again depends on how long you or your family member had held the business.
• Property/Estate: For the property, if you are selling for the first time, then you are liable to be exempted by a considerable amount. You should also check for the maintenance cost and other costs to be covered.
• Owner of real estate: Those who own real estate generally apply the principle of reducing the costs because of the depreciation in the cost and amount. This also means that the cost is generally lower than what it was in the first place.
Is there any advantage in having a long-term investment versus a short-term one?
Yes, there is a good advantage when you have a long-term investment compared to a short-term one. This is because you would be required to pay less if you have the possession for more than a year. The tax applied on a product that was kept for more than a year will always be lower; therefore, most taxpayers are asked to sell their possessions after keeping it for a long time, such as after a year.
