What is it?
The capital gains tax is the levy on the profit that an investor makes when an investment is sold. It is owed for the tax year during which the investment is sold. The long-term capital gains tax rates for the 2022 and 2023 tax years are 0%, 15%, or 20% of the profit, depending on the income of the filer. An investor will owe long-term capital gains tax on the profits of any investment owned for at least one year. If the investor owns the investment for one year or less, short-term capital gains tax applies. Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year, after which the tax on the profit will be lower.

Capital Gains Tax Rates

How to calculate Capital Gains Tax?

Capital losses are deducted from capital gains to calculate the taxable gains for the year. The calculation becomes a bit more complex if both short term and long term capital gains are included in the same year. The short-term gains are netted against the short-term losses to produce a net short-term gain or loss. The same is done with the long-term gains and losses.

How to avoid capital gain taxes?

If you want to invest money and make a profit, you will owe capital gains taxes on that profit. There are, however, a number of perfectly legal ways to minimize your capital gains taxes:

  • One needs to hold onto their investments for more than a year otherwise it will be treated as regular income and a higher tax rate would be charged.
  • Use your capital losses to offset your capital gains
  • Use tax advantaged retirement plans to minimize your cut to the government
  • Sell profitable assets after retirement as retirement income will be lower

Effects of Capital Gains tax

Proponents of a low rate on capital gains argue that it is a great incentive to save money and invest it in stocks and bonds. That increased investment fuels growth in the economy. Businesses have the money to expand and innovate, creating more jobs. 

Opponents of a low rate on capital gains question the fairness of a lower tax on passive income than on earned income. Low taxes on stock gains shifts the tax burden onto working people.

Bottom Line

Taxes known as capital gains are levied on earnings made from the sale of assets like stocks or real estate. The tax is computed by calculating the difference between an asset’s sale and acquisition price.

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