How to Understand Capital Gains Tax

A simple definition for capital gains tax would be a tax levied on the profits you make from the sale, transfer or giving away of any asset. This asset could be anything from___ Capital gains tax differs from individuals to companies and from short term gains to long term gains. Here are a few steps that should help you understand capital gains tax.

Instructions

Difficulty: Moderately Easy

1. Understand the difference in capital gains tax applicable to companies and individuals. The rates for individuals are less than the charges on companies.
2. Ascertain the difference between long-term capital gains and short-term capital gains as well as a short-term loss and long-term loss. A short-term gain or short-term loss is defined as a gain or loss on the sale of an asset with a holding period of a year or less. A long-term gain or loss on the other hand is the gain or loss arising out of a sale with a holding period of over a year. Note that a short-term gain invites lesser tax rates while a long-term gain invites higher tax rates depending upon the tax bracket you fall under.
3. Study the exemptions on capital gains tax.
4. Review the law to keep track of changing tax rates.

Tips & Warnings

• It is always better to seek the help of a professional advisor to understand the effect of capital gains tax on your investment.