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How to Understand Capital Gains Tax

How to Understand Capital Gains Tax PhotoKnowing facts about capital gains may not be necessary for most individuals, especially those who don’t own a large company or the like. On the contrary, facts about this topic play a significant role for every person.

It may sound complex and mind-boggling at first but once you get used with all the terms, understanding capital gains will just be a piece of cake. So where should you start learning? How will you digest every information effectively?

Read along to answer those questions and more.

Capital assets

The first step towards your journey of learning would be regarding capital assets. Everything you own that can’t be turned into cash quickly is considered by the IRS or Internal Revenue Service as a capital asset. That can be a boat, house, cars, stocks and even jewelries. Gold, silvers and diamonds can also be considered as capital assets.

Capital gains, losses and capital gains tax

Once you decide to sell any of your capital assets, the proceeds will be called a capital gain. If the proceeds were bigger than the original amount of the item, that is referred to as a capital gain.

On the contrary if what you earned was smaller than the item’s original price that is called a capital loss. Capital gains tax, on the other hand, is the tax that is charged to you if your earnings are considered as capital gain.

Short-term and long-term capital gains or losses

If you hold or own an asset for more than one year prior to making the decision of selling it, that is considered as long-term capital gain or loss. However if, the asset is under your ownership for one year or less, that is considered as short-term capital gain or loss.

Regardless of the time span, keep in mind that the terms “gain” and “loss” will only apply once the asset it already sold.

Taxpayer Relief Act of 1997

A Taxpayer Relief Act of 1997 is a rule in the United States which allows single individuals to reduce or proscribe $250,000 or less from the sales of their assets or better referred to as capital gains. Married couples, on the other hand, can proscribe $500,000 if they will file jointly.

These rules will only apply for residential assets and if you (and your spouse, if you’re married) have lived in the house for at least 2 years out of the past 5 years.

Income tax

Yes, your capital gains tax is connected to your income tax rate. The capital tax you’ll pay depends on the amount of your income tax. Thus, the higher your income tax is (or at least its bracket for that matter), the higher capital gain taxes you will need to pay.

With that being said, it would be of considerable help if you can make an advance computation on your income tax bracket.

As citizens of the US or of any particular place, every individual is subjected to pay various taxes. That is why gaining enough knowledge about these taxes can truly be of considerable help.