What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax imposed on the profit realized from the sale of a capital asset. The tax is only due after the asset is sold.
Capital Gains Tax is a tax on the profit from the sale of a capital asset. The tax rate depends on how long the asset was held and the income level of the filer. Long-term gains, for assets held more than a year, benefit from lower tax rates compared to short-term gains, which are taxed at higher regular income tax rates. Understanding these rules can help in making informed investment decisions and tax planning.
Key Takeaways
Capital Gains Taxes: Due only after an investment is sold.
Capital Assets: Include stocks, bonds, digital assets (such as crypto currencies and NFTs), jewellery, coin collections, and real estate.
Long-Term Gains: Applied to profits from assets held for more than a year.
Short-Term Gains: Taxed at the individual's regular income tax rate, which is typically higher than the rate for long-term gains.
Long-Term Capital Gains Tax Rates for 2023 and 2024
For the 2023 and 2024 tax years, the long-term capital gains tax rates are:
0%
15%
20%
These rates depend on the income of the filer. The higher the income, the higher the rate, with 20% being the highest rate for long-term capital gains.
Capital Assets Subject to Capital Gains Tax
Capital gains taxes apply to profits made from the sale of various capital assets, which include:
Stocks and Bonds: Shares of companies or government/corporate bonds.
Digital Assets: Crypto currencies like Bitcoin and Ethereum, and Non-Fungible Tokens (NFTs).
Jewellery and Coin Collections: Tangible personal property items of value.
Real Estate: Property sales excluding the primary residence under certain conditions.
Differences Between Long-Term and Short-Term Gains
Long-Term Gains: Gains from assets held for more than one year are taxed at a lower rate to encourage long-term investment.
Short-Term Gains: Gains from assets held for one year or less are taxed at the individual's regular income tax rate, which is typically higher. This higher rate is intended to discourage short-term speculative trading.
Example Calculation
Suppose you sell stocks that you have held for more than a year and make a profit. Depending on your income level, your tax rate on this long-term gain might be 0%, 15%, or 20%.
Example Scenario
Income Level: Middle income
Long-Term Capital Gains Rate: 15%
Profit from Sale: £10,000
Calculation:
Capital Gains Tax: £10,000 * 15% = £1,500
If you had held the stocks for less than a year, the profit would be taxed at your regular income tax rate, which might be higher than 15%.
Other Articles
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Does a Company Pay Capital Gains Tax?
How to Calculate Capital Gains Tax
Need an Accountant for Capital Gains Tax?
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