Capital gains are gains from the sale of an asset: financial investment, real estate, personal property, or collectibles.
Capital gains are either long term or short term depending on how long you’ve owned the asset.
Short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at special, lower rates.
We’re all pretty sure what profit means. Income is income – isn’t it?
Tax officials treat different types of income differently, at least in terms of tax rates. This is especially true for profits from your investments or capital gains in financial terms.
In short, the IRS tax certain capital gains at a lower rate than other types of capital gains. Therefore, it is important for every investor and their investment strategy to understand the pros and cons of capital gains.
What are capital gains?
Capital gains are made up of the money you get from selling capital assets.
All capital assets have a base that you would normally have paid for the asset as well as any money that you invested in improving it.
When you sell a capital asset, the difference between the selling price and your base is either a capital gain or a capital loss.
Basics of capital gains tax
When you sell a present value, the profit is classified as either short-term or long-term based on how long you owned the asset prior to the sale date.
If you have owned the asset for more than a year, it is usually a long-term capital gain or loss. If you’ve owned it for a year or less, the gain or loss is short-term.
Why is that so important? Because how long you hold the asset will determine the tax rate you pay on your profits – capital gains.
Tax rate for short-term investment income
For short term capital gains, this is a no-brainer. They are taxed like any other normal income, e.g. B. wages or income from a company or self-employment. Short-term capital gains taxes correspond to the normal income tax brackets.
Long-term capital gains tax rate
With long-term capital gains, things get more interesting. You are entitled to special tax rates. In most cases, these are lower than the tax bite from your decent income and short-term gains.