Buying and selling anything nowadays can easily prove to be a costly venture. It entails going through quite a number of different costs. Among all the different costs that need to be considered when going over your numbers, one particular payment factor that’s bound to stand out most after a round of observations is your capital gains tax.
What is capital gains tax?
Capital gains tax is a government-imposed levy that is assessed on the overall return that an investor gets on a specific item. Technically speaking, the amount charged is the positive difference between the price at which an asset is sold and the price at which it is acquired—which is essentially profit sans additional costs.
With regards to extended periods of time, a long-term capital gains tax is levied on the profits that are earned from the sale of any asset that has been stored for more than a year. On the other hand, a short-term capital gains tax is charged on any kind of asset that is held for a year or less. This cost will later be taxed as ordinary income.
The total amount that is charged with this particular tax depends on the set rate that is assigned to you. It could be zero percent, 15 percent, or 20 percent, depending on your tax bracket.
Can it be reduced?
Absolutely! What most investors don’t understand about capital gains tax is that it can actually be reduced to save on a lot of expenses without needing to do anything drastic or illegal.
In most cases, the foremost way to cut down the total amount spent on taxes is to deduct the capital losses that occur when a taxable asset is sold for less than the price that it was acquired. That, in turn, leads to capital losses, which is a factor that plays a significant role in determining the net capital gains that your business incurs.
It is worth noting, however, that taxes on capital gains will only be triggered when an asset is realized or sold.
Are there any exceptions?
Generally speaking, there is no such thing as an asset that is exempted from a capital gains tax. However, there are some costs that experience the entire process and system differently from everything else. Here are a few categories of assets that typically get a different treatment:
Investment real estate
For those who invest in real estate, the capital gains tax that is charged based on the value of an asset can be reduced by using depreciation deductions against income. That further illustrates the steady deterioration of a property over time. When filed and recorded correctly, this very deduction for depreciation will, in turn, reduce the amount that you’ve paid for the property itself and increases your taxable capital gain when you sell it—leading to greater rates.
Another sector of goods that most people don’t expect to experience capital gains tax is collectibles. Pieces, such as antiques, jewelry, precious metals, and arts are charged at a 28 percent capital gains tax regardless of what your tax bracket is.
Despite the fact that it may seem like a complicated (or even intimidating) concept at first, capital gains tax is a straightforward concept that follows basic rules and principles. By taking all the key details in mind, you’ll be able to strive to get the most out of your next investment after paying the tax.
We specialize in helping investors in America manage capital gains tax, like-kind exchanges, and real estate exchanges on the purchases they make. Get in touch with us today!