What Exactly Is a Capital Gain?
A capital gain is the increase in the value of a capital asset when it is sold. A capital gain occurs when you sell an asset for more than you paid for it. Almost any asset you own is a capital asset, whether it’s an investment (such as a stock, bond, or real estate) or something you bought for personal use (like furniture or a boat). When you sell an asset, you realise capital gains by deducting the original purchase price from the sale price. In certain circumstances, the Internal Revenue Service (IRS) taxes individuals on capital gains. Read more about capital gains tax india here.
Understanding Gains on Capital
As previously stated, capital gains are the increase in the value of an asset. These profits are typically realised when the asset is sold. Because of their inherent price volatility, capital gains are commonly associated with investments such as stocks and funds. They can, however, be realised on any security or possession sold for a price greater than the original purchase price, such as a home, furniture, or a vehicle.
Capital gains are classified into two types:
Those who make short-term capital gains are those who own something for less than a year and then sell it.
- Long-term capital gains are made when an asset is sold after more than a year.
- Short-term and long-term gains must both be reported on your annual tax return.
Understanding and incorporating this distinction into an investment strategy is especially important for day traders and others who take advantage of the increased ease of trading in the market online.
Mutual Funds and Capital Gains
Mutual funds that accumulate realised capital gains during the tax year are required to distribute them to shareholders. Many mutual funds distribute capital gains just before the calendar year ends.
Shareholders receive the fund’s capital gains distribution and a 1099-DIV form detailing the amount and type of gain (short-or long-term). When a mutual fund distributes a capital gain or dividend, the net asset value (NAV) decreases by the amount of the distribution. A capital gain distribution has no effect on the total return of the fund.
Capital Gains Exemplification
Here’s a fictitious example to demonstrate how capital gains work and how they’re taxed. Assume that Jeff paid $350 per share for 100 shares of Amazon (AMZN) stock on January 30, 2016. He then decided to sell all of the shares on January 30, 2018, for $833 each. Assuming no fees were associated with the sale, Jeff realised a capital gain of $48,300 ($833 x 100–$350 x 100 = $48,300).
Jeff makes $80,000 per year, putting him in the huge income bracket ($40,001 to $441,500 for individuals and $80,001 to $496,600 for those married filing jointly) that qualifies for a 15% long-term capital gains tax rate.
As a result, Jeff must pay $7,245 in tax on this transaction ($48,300 x 0.15 = $7,245). Find more details about income tax slab rates here.
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