Nowadays, most of us actively invest in capital assets such as mutual funds and stocks. The return that we get depends on the value of the stocks going up, plus the amount that we get on reselling them. Most active investors have a higher tendency of reselling stocks to earn money. But, there are some clauses associated with reselling of capital assets.
There is a tax implication if you sell capital assets such as mutual funds or stocks. But the rate of the tax to be paid depends on several factors. In this guide, we will discuss capital gains taxes and how to calculate them.
Table of contents
- What is capital gains tax?
- How to calculate capital gain tax?
- Capital gains tax rates: Short-term vs Long-term
- Summing Up
What is capital gains tax?
The meaning of capital gain tax is white state forward. It is the difference between the amount you paid for purchasing a capital asset (as in bonds, mutual funds, real property, or stocks) and the amount you received when you sold it.
There are two possible scenarios when you sell any capital asset. You can gain by selling a capital asset if you sell it at a higher price and you can undergo a loss if you sell it at a lower price. These two scenarios are known as capital gain or a capital loss.
The capital gains tax is the taxation of capital assets. The tactician is usually classified by how long you have held the ownership of any given capital asset.
How to calculate capital gain tax?
The basic step of the capital gain calculation is to find the difference between the amount you paid for purchasing the asset or property and the amount you received when you sold it. Let’s go through step-by-step and find out the answer to “How to calculate the capital gains tax?”
The four basic steps for calculating capital gain tax:
- Determine your basis. This is commonly the purchase price including any commissions or fees paid for acquiring the asset. The basis may also be increased by reinvested dividends on stocks and additional factors.
- Determine your realised amount. This is the sale price excluding any commissions or fees paid.
- Subtract your basis (the amount you paid for getting the ownership of the capital asset) from the realised amount (the amount you received when you sold the Capital Asset) to determine the difference.
- If you sold your assets for are higher than the amount you paid, you have a capital gain.
- If you sold your assets for are higher than the amount you paid, you have a capital loss. You can even study, “How you can use capital losses to offset capital gains tax?”.
- You can go to the categorization given below to see that you live within which tax bracket.
Capital gains tax rates: Short-term vs Long-term
Once you have determined that you have made a capital gain, you start wondering how much amount you will have to pay as capital gain tax. It majorly depends on the fact that if your investment is a short-term capital gain on the long-term capital gain. Let’s go to the difference below to understand the tax rates:
- Short-term capital gain tax rates
Short-term capital gains are applied to assets or property you held for one year or less. They are subjected to ordinary income tax rates, this implies they are taxed federally at either 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
- Long-term capital gains tax rate
Long-term capital gains are applied apply to assets that you held for over one year and are taxed differently. The federal tax rate for your long-term capital gains depends on where your income falls in relation to three cut-off points.
Just keep in mind that you don’t make any of the common mistakes. You can just check the book of records on a regular basis and avoid making common errors. Keep some time for reviewing the calculations from time to time to avoid any cumulative problems.
If at any point you feel that you are unable to calculate the capital gain tax or you just wanted reassurance, you can reach out to an accounting consultant and he can solve all your issues by helping you out. We at 123finacials can help you in connecting with the best startup accounting experts.
Source: Plato Data Intelligence: Platodata.ai