What is the capital gains tax? How does it affect you?
Hello to all and Happy Holidays !! It’s me, Erica Fields, your money motivator and your growth instigator bringing you the KEYS TO YOUR FINANCIAL HOUSE!! I hope you have had an opportunity to relax and be with those you love and enjoy the company of.
This time of year is commonly filled with cheer and thanksgiving but your favorite bookkeeper/tax preparer is busy gearing up for the the beginning of the end. You know, it’s when I begin to review client financial data to assess income and tax deductions to get an estimate of what might be due for the last estimated tax payment due on January 31st.
Taxpayers whose earned income from a W2 job and have investment income may not quite understand the importance of a quarterly check up until their first year paying taxes passive income. A capital gains tax is assessed make a profit on a capital investment. The profit is known as capital gain. If there is a loss, then it is referred to as a capital loss.
A capital investment is the purchase of a capital asset. These could include mutual funds, stocks, bonds, precious metals, real estate, fine art, coins and other types of collectibles. The profit that is earned on the sale of any of these items can trigger a capital gains tax. Items which are not considered to be capital assets include dividends, interest and wages. Those items are considered to be ordinary income.
It is important to keep track of all investments made to calculate the potential capital gains tax. In order to calculate the capital gains tax, the taxpayer must know what was purchased and how much was invested at the time of the purchase. Other information needed to calculate the capital gains and capital gains tax includes all brokerage fees and commissions as well as the date of the purchase. The sale date must also be known as well as the sales price and any fees that were paid at the time of the sale.
Capital Gains Formula
There is a simple formula for calculating the capital gains tax. Begin by taking the sales price and deducting any commissions and fees. Then deduct any buying fees and commissions and subtract the purchase price. This will leave the profit amount or the loss amount.
The final capital gains tax is based upon the amount of the capital gain. It is also the type of capital asset which was invested in and the length of time that the asset was held. The length of time for which the asset was held can make a big difference on the amount of the capital gains tax. If the holding period was one year or less, then it is referred to as a short-term capital gain and is subject to regular income tax rates. It is considered a long term capital gains if held for longer than a year. The exact amount will depend on your tax bracket.