Capital Gains Tax Explained

Capital Gains Tax is imposed on capital accumulation, investment, and productivity. Some of the income subject to capital gains tax includes selling an investment, a home, a family business, a farm or ranch, or even a work of art. The capital gains tax is applied on the difference between the price paid for an item and the money received from selling it or the capital gain. The most common form of capital gain for people in the sale of their corporate stock. Individuals’ capital gains tax rate is currently at one of its highest rates ever and is at 28%, while the corporate rate is at its greatest level in history, namely 35%. There is inequality with capital gains tax because people must pay taxes on all of their gains but are only able to deduct a portion of their losses. This particularly applies to investments that fluctuate between gains and losses over time. In many states, taxpayers are liable for the federal capital gains tax and the state’s form of capital gains tax. This can take the combined rate to almost 40%. California, Montana, and Rhode Island are amongst the highest in the country.

For the government, the capital gains tax payment represents 6% of personal and corporate income tax receipts and 3% of total federal revenues. There is a lot of controversy surrounding the capital gains tax that individuals and corporations have to pay. Still, it brings in much less revenue for the federal government than most people think. The total collections during the 1990s were between $25 billion and $30 billion a year. In the USA, capital gains are not indexed for inflation, which means that the seller pays capital gains tax on the actual gain and the gain attributable to inflation. This is why the capital gains tax is lower than regular income tax rates.

In other countries, such as the United Kingdom, the capital gains tax rate is much higher (over 40%), but it is indexed to inflation. The difference between capital gains tax and all other federal tax forms is a voluntary tax. People can avoid paying any tax by simply not selling their assets. This is becoming increasingly common, especially with the uncertainty of the stock market. The government estimates $7.5 trillion of unrealized capital gains, which would all be subject to capital gains tax if it was sold.