capital gains tax

Capital Gain Tax Rates: Tax On Profits Earned On Capital Assets

capital gains tax

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Capital gain is the profit earned by an assessee on the capital assets. The capital gains can be from the sale of any fixed or movable assets the gains can also be from other sources such as the sale of shares and securities. The profits so gained are taxed under the head “income from Capital Gains”. Here is FinanceShed giving complete information about Capital gains tax and its rates.   

Types of Capital Gains

capital gains tax

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Capital gains are mainly of two types – short term capital gain and long term capital gains. This bifurcation is done on the basis of time duration for which asset is held. Short term is basically those investments that are held for less than 12 months and long term investments are those which normally held for more than 12 months.

Short Term Capital gains

Short-term capital gains are generally considered as ordinary income and taxed as ordinary income. Any gains pertaining to the investments you held for less than a year must be included in your taxable income for that year and it’s treated as one of the ordinary taxable income. The taxability is uniform depending on the nature of capital across all countries. The rate at which you have to pay tax depends on the tax slabs in the concerned country and particular year.

Long Term Capital gains

The long term capital gain or loss is the gain from the sale of qualifying assets. The gain or loss amount is determined by the difference in the value of sales price and purchase price. The investor does not have gain while selling every time thus this figure is either the net profit or loss that the investor experienced when selling the asset. The IRS taxes long-term capital gains at a reduced rate to encourage individuals and businesses to hold on to investments that are 0%, 15%, or 20%.

Formula for calculating Capital Gains

capital gains tax

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The formula for calculating capital gain is as follows:

Short-term capital gain = Total Consideration – (cost of acquisition + cost of improvement + cost of transfer)

Long-term capital gain = Total consideration – (indexed cost of acquisition + indexed cost of improvement + cost of transfer).

Tax rates for both categories:

Tax rates on Long term capital gains are fixed at 0%, 15%, and 20%. Whereas the Short term capital gains are taxed at 10%, 12%, 22%, 24%, 32%, 35%, and 37% as it is considered as part of your regular income.

How to calculate Capital gains?

capital gains tax

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While the capital gains taxes apply on investments, such as stocks or bonds, real estate, cars, boats, and other tangible items which basically taxed when you sell these items for the price higher than the purchase price. There can be multiple assets or investments held by you as well as sold during a single period under tax and the difference between your capital gains and your capital losses are called your “net capital gain.”