What is Capital Gains Tax?

If you have held and sold any investments in the last fiscal year, the IRS is going to tax your profits. This is called a Capital Gains Tax.

Capital gains tax is a tax on the profit from an investment that is incurred when that investment is sold. When stock shares or any other taxable assets are sold, the capital gains (or “profits”) are said to have been “realized.” The tax doesn’t apply to unsold investments because they are unrealized, so stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

Long-term capital gains tax

Under current federal tax policy, the capital gains tax rate only applies to profits from the sale of assets that were held for more than a year, which are called “long-term capital gains.” The rates can be 0%, 15%, or 20%, depending on the taxpayer’s tax bracket for that year.

Short-term capital gains tax

Short-term capital gains tax, on the other hand, only applies to assets held for a year or less. These short-term capital gains are taxed as ordinary income. One thing to consider is that, for most taxpayers, the tax rate for ordinary income is often higher than the capital gains rate. As a result, it is often more profitable to hold investments for at least a year before selling.

In summary- Capital gains tax is only due after the investment has been sold, and only applies to “capital assets,” which include stocks, bonds, jewelry, coin collections, and real estate. For most taxpayers, the tax rate for long-term gains is lower than the rate for short-term gains. 

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