Definition: Capital gains tax is a levy imposed by the government on your profits from investments, such as stocks or real estate. Your profits are referred to as capital gains. You will pay capital gains tax in the tax year you sell the asset, and the tax rate you will pay depends on how long you have owned the asset and your income.
How does capital gains tax work?
Capital gains tax becomes due only when you sell your investment. For example, you won’t owe any tax while the value of the stocks in your portfolio increases. However, when you sell your shares, you must report the profit on your tax return. As a result, you will pay tax on your profit based on the capital gains rate.
Examples of capital gains tax
For example, let’s say you buy a share for $10 each. You purchase 10 shares for a total investment of $100. After more than a year, you sell those 10 shares for $12 each for a total of $120. In this case, you made a $20 capital gain. This profit is taxed according to your total income for the year, including all profits from your job. Let’s say your total income for the year was $40,000, and you filed your taxes as an individual. In this case, the long-term capital gains tax rate is 0%, and you will not pay any tax on that $20.
Do I have to pay capital gains tax?
The top 1% of earners in the United States pay about 75% of the capital gains taxes collected on average each year. When including the 3.8% Net Investment Income Tax (NIIT) that applies to certain high-income earners, those living off investment income may have to pay 23.8% in taxes unless income is derived from assets held for less than one year.
Source: https://www.thebalancemoney.com/what-is-the-capital-gains-tax-3305824
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