What is Capital Gain Tax Rate?

Most of our tax problems arise due to our own attitudes towards it. We don’t even want to talk about it unless tax season arrives. Take personal finance blogs for example; most of them don’t talk about it for 10 months of the year. As soon as it’s March, their blogs are full of posts on how to save money on tax, what are deductibles, and blah, blah, blah.

Not their mistake, I must say. They do what we demand. We, as readers, don’t like talking or reading about tax, hence they don’t write about it, and we remain uneducated about tax, all the time.

Here is a pledge: I would write regular posts on tax to explain my readers the importance of knowing about it, and make them knowledgeable enough to file their own taxes effortlessly. Before we start, let me tell you, taxes just have big and difficult names. However, it’s very easy to understand what they mean.

Let’s start with capital gain tax rate. Heard about it? No?

What is Capital Gain?

Money earned though investment is known as capital gain. In other words, capital gain is gaining from your capital. I told you, it’s all very simple.

What is Capital Investment?

Another simple term. Capital Investment is an investment product in, in order to achieve capital gains. It could be anything from stocks, bonds, mutual funds to property, fine arts, and any thing you could earn profits from. It would, however, not include wages, interest, and dividends, as they are income, not investments.

How to Calculate Capital Gains?

As simple as calculating normal profits on your investment. You don’t have to have any capital gain tax rate calculator or contact a financial consultant to do so. Here’s the formula:

Capital Gains = Sell Price – (Cost Price + Trading Costs)

Here, trading costs would include expenses given as commission or brokerage. You would, however, not have any space to mention these costs details in form 1040 schedule D. Hence, you will need to include everything under one category ‘Cost Basis’. This form would have space to detail out all your capital gains, which eventually totals up as net profit. Tax is charged on this amount.

But How Much Capital Gain Tax Rate Is Charged?

This depends on how long you had held the investment. If an investment is sold before a year of purchase, the profit earned on it is termed as short term capital gain. Taxes on this profit would be charged according to the tax bracket the investor is in.

If the investment is liquidated anytime after a year of purchase, it is termed as long term capital gains. Taxes charged on this income are usually lower than their current tax bracket. If you are in tax bracket of 10% and 15%, you will have to pay 5% on long term capital income. And if you are in 25% to 35%, you will have to pay 15%.