Capital gains tax is a tax imposed on capital gains or the profits that an individual makes from selling assets. It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets. They may be realized in short term (few hours or days of holding an investment) or long term (decades of holding an investment). Capital gains are not the income you earn as an employee or from your own business but are rather due to the increase in value of your investment.
Source:- https://www.canarahsbclife.com/tax-university/articles/capitals-gain-income-tax.html
Therefore, they are taxed differently than regular income. Capital gains are calculated by subtracting the basis (original investment) from the final sale price. For example, if you purchase an investment property for $1,00,000(basis) and sell it for $6,00,000(sale price) the capital gain will be $5,00,000. The tax is only imposed once the asset has been converted into cash, and not when it’s still in the hands of an investor. For instance, assume that an individual owns company shares, which increase in value each year. In this case, no capital gains tax will be levied just because the shares are appreciating. The only time the capital gains tax will be imposed is when the individual decides to sell the shares for a price higher than their purchase price.
Source:- https://timesofindia.indiatimes.com/business/faqs/income-tax-faqs/what-is-capital-gains-tax/articleshow/93588264.cms
Capital gains tax can be divided into long term capital gains tax (LTCG) and short-term capital gains tax (STCG) depending on how long you have held the investment in question. Short term capital gains are any capital gains made from an investment which was held for less than one year. For example, if you purchase stock in a corporation, held it for 9 months and then sold it for a profit, the profit will be called STCG. It is taxed at a higher rate than LTCG.
Long term capital gains are those derived from an investment held for more than one year. For instance, if you held that same stock for two years before selling it, your profit would be termed as LTCG. These are termed as unearned income by IRS (internal revenue service). Unearned income is different from earned income, which is money you have earned through your employment. It is the profit derived from interest, dividends, capital gains and other forms of income not directly related to your pay check. LTCG is taxed at a lower rate as the government treats it as an economic benefit. In India LTCG tax was 0% till 31st March 2018 but after that tax was collected for gains which are in excess of Rs.1,00,000.
When the value of investments is lower than the original purchase price and are realized when investment is sold it is known as a capital loss. Investors may offset taxes owed on capital gains by factoring in their capital losses. To reduce capital gains tax one must:-
• Waiting longer than 1 year before selling: - One of the benefits of capital gains that fall under the long-term status is that they attract lower capital gains tax rates. Holding the assets for a longer period of time will reduce the tax that one is liable to pay.
• Sell when your income is low: - LTCG rate is determined by one’s marginal tax rate, which is then dependent on an individual’s income. Situations that may cause a decline in an individual’s income include approaching the retirement period, quitting, or loss of employment. Selling assets at such time can minimize the amount of capital gains tax levied.
• Timing capital losses with capital gains: - capital losses can be used to offset capital gains. for example -an individual owns two types of stocks: A and B. When he sells stock A, he makes a profit of $100, but when he sells stock B, he makes a loss of $80. His net capital gain is the difference between his capital gain and loss: $20. By using capital losses in the years where he made capital ins, an individual can lower his capital gains tax significantly. Even though individuals are required to report all their capital gains, the tax to be levied is computed on the net capital gain.
Source:- https://edition.cnn.com/election/2020/primaries-caucuses/candidate/bloomberg
"If Warren Buffett made his money from ordinary income rather than capital gains, his tax rate would be a lot higher than his secretary’s. In fact, a very small percentage of people in this country pay a big chunk of taxes."
-Michael Bloomberg
Article by:- J Shree Nidhi and Aadya
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