Capital Gains Tax
Candlefocus EditorCapital gains taxes apply to "capital assets," which can include a range of items such as stocks, bonds, digital assets like cryptocurrencies and NFTs, jewelry, coin collections, and real estate. Any profits made when these items are sold is taxed as a capital gain.
The taxes on these capital gains can be classified as long-term and short-term. Long-term capital gains occur when an investment is held for more than one year before being sold. Those taxes are usually lower than those applied to short-term or ordinary gains. Short-term capital gains occur when an asset is held for less than a year and is then sold. These gains are taxed at the regular income tax rate applicable to individuals.
The tax rate applied to a capital gain depends on a variety of factors, such as the type of asset, the size and length of the sale, and the individual taxpayer’s income level. Generally, the higher an individual's taxable income, the higher the tax rate applied to their capital gains.
The federal government generally provides tax breaks for investments held for a long time, as an encouragement to invest and promote economic growth. This is why long-term capital gains are usually taxed at a lower rate than short-term gains.
Capital gains taxes are due at the time of sale, and it’s important to report them proactively. A lengthy reinvestment of capital gains can compound potential tax liability, and failing to be proactive can lead to penalties and interest owed. A tax professional can help ensure investors are in compliance and properly filing their taxes.
In summary, capital gains taxes are taxes on the profits made on the sale of certain investments. The taxes can be categorized into long-term and short-term gains, with taxpayers owing higher taxes on short-term capital gains. It’s important to contact a tax professional to understand the state and federal requirements and ensure any capital gains taxes due are properly reported and paid.