Nobody likes taxes, but if you don’t know about them you could end up hurting your business. Click here to have capital gains tax explained.
The very first tax the nation had was ratified in 1913 under the 16th Amendment. It enacted a one percent tax on people who made $3,000 or more a year and charged people who made more than $500,000 a year an additional six percent.
Today the tax code is much more complicated and we pay taxes on all sorts of different kinds of transactions, one of those being the capital gains tax.
In this article, you’ll have the capital gains tax explained so you can make the right decisions for yourself and your business.
Capital Gains Tax Explained
The government taxes all investments differently. The capital gains tax is a fee you pay when you sell stock investments or real estate. The gain is the difference between the price you sold for and what you purchased it for.
The opposite of a capital gain is a capital loss, which often can be used to offset gains on your end-of-year tax return.
A capital gains tax is typically paid when a home or stock sells. The government defines short-term gains as separate from long-term gains and they are taxed at a different rate.
Short-term gains are the kind that is taxed higher. This is to discourage people from frequently buying and selling stocks. When people are buying and selling too much, the market can become volatile and collapse.
How Much is the Tax?
The amount you will pay for capital gains on your property or stocks has to do with what income bracket you are in. If you are in the 15 percent tax bracket, then you won’t have to pay anything at all. This is to encourage those close to the poverty line to invest.
If you are in the highest income bracket, then your tax rate shoots up to a whopping twenty percent.
Fun Fact: Collectibles like stamps and coins are taxed at a separate rate than other investments. You can expect to pay as much as 28% of your earnings from selling collectibles in taxes.
When the Affordable Care Act was passed in 2013, it had a major effect on capital gains taxes. If a single person makes more than $200,000 a year or $250,000 filing jointly with a spouse, then they have to pay an extra 3.8 percent on their investment income.
Avoiding the Tax
There are ways around the capital gains tax, primarily a 1031 exchange is a great method. In a 1031 exchange, you defer paying the government taxes on your investment gain in exchange for reinvesting it into another project.
The government wants to encourage developers to continue what they are doing and incentivize reinvestment. Protect your finances this year by planning ahead and considering a 1031 exchange.
More Helpful Articles
The capital gains tax is levied on investments like property and stocks when you go to sell them. But there are ways to avoid paying this tax, like being in the bottom 15 percent of wage earners or filing for a 1031 exchange.
Now that you’ve had the capital gains tax explained to you, you’ll be more prepared the next time you sell an investment.