Posted by Fletcher Accounting and Tax Service Inc.

A Simplified And Comprehensive Look At Long-Term Capital Gains Tax

A Simplified And Comprehensive Look At Long-Term Capital Gains Tax

Before understanding long term capital gains tax, let us first see what is capital gain? The concept can be explained better with an example, so, for instance, if you decide to sell a share or stock or something substantial, and the amount you get in return is much higher than the amount at which you purchased your selling. This rise in value of money before and after selling is called capital gain. And, the tax imposed on the increase in value is called the capital gains tax.

So, in other words, the amount of capital gain is deduced by the subtraction of the proceeds in sale from the adjusted cost basis. The cost basis is the amount of money you pay to purchase a certain asset that include the commission of the broker at the time of the business deal.

What is the difference between long term capital gains and short term capital gains?

Whether the capital gain on the sale of an asset or on a selling of share of stock is long term or short term, it tax charge is consequently imposed. So, if the asset is withheld for a year or less than a year, then the capital gain incurred on it is short term. And if the asset is withheld for more than one year, then the capital gain resulting from it will be on a long term basis.

Another evident difference between the two concepts is that if the short term capital gains are taxed at the same rate and percentages as the standard income tax rates, the taxpayers are required to pay long term capital gains tax on the equivalent rate of the eligible dividend income.

Some of the taxable income rates of 2018 

So, if we take in to account the rates of the present year, we can see that that if long term capital gains reduce to $38,600 of the income that is subject to tax, then there is a 0% rate of tax on long term capital gains. And if the married couple files for taxes on long term capital gains jointly, then it is taxed on the rate of 0% if the amount fall below the $77,200. 

Consequently, when the long term capital gains fall above the 0% starting point but fall in the range that is less than $42,500, they are taxed at the rate of 15%. And if the long term gains come under the rate that exceeds to 15%, then they are taxed at the rate of 20%.

Some important points to consider regarding long term capital gains

An important point for you to notice here is that if you are deciding to sell an investment whose value has surpassed from its existing one or cost basis, then it is preferable that you hold back the investment for some time before making a final sell. In this way, by holding back the asset for long enough, the capital gains on it can be considered as long term.

Furthermore, also keep in mind that for a capital gain to occur, there has to be a sale of an asset. The taxpayer needs to keep this point ingrained in his mind so that whenever there are any rise and fall in the values of an asset, he or she should know that they are tax-exempt instances. 

How capital gains impact mutual funds taxation?

Those investments that are in an appreciated amount or in large quantity are called mutual fund. A mutual fund may take in possession thousands of stocks, investments, bonds or contracts.

Each mutual fund has to bear the responsibility of paying income tax on a significant portion of the disposable capital gain on yearly basis. However at times the situation becomes contrary to common sense expectation. It means that whenever a mutual fund realize a capital gain from its investments, it may differ considerably from the actual change of value in the investments in the mutual funds. 

Even when the value of investment in mutual funds decrease in value, the investors still have to pay taxes on the net capital gain. It is also possible that even though, over the time, when the value of the mutual funds rises, the long term capital gains arising from the sale of investments in the funds may still be decreasing in value.

Fletcher Accounting and Tax Service Inc.
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