Capital gains tax is the tax levied on the profit from selling an asset that has increased in value. Short-term capital gains (assets held less than one year) are taxed as ordinary income, while long-term capital gains (assets held more than one year) receive preferential tax rates of 0%, 15%, or 20% depending on your taxable income. Understanding capital gains tax is crucial for investment planning and tax-loss harvesting strategies.
Capital Gains Tax
Definition
Capital gains tax is the tax levied on the profit from selling an asset that has increased in value. Short-term capital gains (assets held less than one year) are taxed as ordinary income, while long-term capital gains (assets held more than one year) receive preferential tax rates of 0%, 15%, or 20% depending on your taxable income. Understanding capital gains tax is crucial for investment planning and tax-loss harvesting strategies.
Example
If you bought stock for $10,000 and sold it for $15,000 after holding it for two years, your $5,000 long-term capital gain would be taxed at 0%, 15%, or 20% depending on your income level.
Key Points
- 1Short-term gains taxed as ordinary income
- 2Long-term gains taxed at preferential rates (0%, 15%, 20%)
- 3Holding period determines short-term vs long-term
- 4Tax-loss harvesting can offset capital gains
Related Terms
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