The Lowdown on Capital Gains Tax

September 6, 2021

Capital gains tax is a complicated issue. There are two types of capital gains, short-term and long-term. Short term refers to any period less than one year, while long-term refers to anything over one year. This blog post will explain both types of capital gains and what you need to know about each one before filing your taxes.

What is Capital Gains Tax

Capital gains tax is the tax you will pay for any equity or asset that has grown in value. The tax is calculated by taking the difference between the purchase and sell prices and then subtracting it from the sale price. This number is multiplied by a specific capital gains tax rate (which you can calculate based on your filing status) and then added to your income taxes.

Short-Term Capital Gains:

This type of capital gains tax is much simpler to calculate than the long-term. Short-term capital gain refers to any time less than one year in which you sell an asset and make a profit. If you bought your stock on May 20th, 2015, and you sold your stocks in December 2015 for more than what they were worth when you purchased them, then you have a short-term capital gain, and it will be taxed as ordinary income.

If your stocks are worth the same amount or less than what they were when you bought them, then there is no tax implication on this type of sale. The IRS provides "mark to market" accounting that requires taxpayers to calculate their gains and losses from the date they purchase assets to be eligible for long-term capital gains.

Long-Term Capital Gains:

This type of capital gain is much more complicated than the short term because it takes periods into account, which means that you might not know how much tax will be assessed until after your fiscal year has ended. Long-term capital gains refer to any time period over one year in which you sell an asset and make a profit. If you bought your stock on May 20th, 2015, and you sold your stocks on June 10th, 2018, for more than what they were worth when you purchased them, the IRS will assess it as a long-term capital gain.

If you wanted to make this sale and it was all part of your long-term investment strategy, that is fine too. You will be assessed tax on any profits made from the stock sales.

Long-term capital gains can be taxed at either the same rate as your income, or they could be made up of what is called preferential tax treatment. The shorter the period you hold onto an asset, then there will be higher taxes on it when sold, while for long-term capital gains, if you outweigh enough years on your investment and then you sell, then your taxes will be lower.

Summary:

Conclusion paragraph: The tax on capital gains is something that many people have questions about. There are two types of capital gains, short-term and long-term. Short-term means your investment was held for less than a year before you sold it, while long-term means you've owned the investment for more than one year before selling it. If you're in this situation and want to know more about how much money will be taken out of your profit from an investment sale, contact us today!

 

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