Capital Gain, Capital Gains
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Capital gain is the profit resulting from the investment in capital assets such as real estate, stocks, mutual funds and bonds. Capital gain is also known as investment income.
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Types of Capital Gains
Capital gains are classified on the basis of the holding period that is determined from the date of buying an asset to the date of selling it.
Capital gain is the profit resulting from the investment in capital assets such as real estate, stocks, mutual funds and bonds. Capital gain is also known as investment income.
Types of Capital Gains
Capital gains are classified on the basis of the holding period that is determined from the date of buying an asset to the date of selling it.
Short term: This pertains to gains that are made from the sale of an asset which is purchased spanning a period of 36 months. However, this period is 12 months in case the assets are stocks and mutual funds.
Long term: This pertains to profits that are realized by selling an asset which had been purchased more than three years ago. In case of stocks and mutual funds, this period is reduced to 12 months (one year).
How to Calculate Capital Gains
Capital gains are calculated by subtracting an asset’s purchase price from its selling price. The brokerage that an investor pays is also considered. Hence, the formula to calculate capital gains is:
Capital gain = selling price – (cost price + buying brokerage + selling brokerage)
Taxes Applicable on Capital Gains
Capital gains are taxed in most countries. The taxable rates will depend on the type of underlying investment and the holdingperiod. They also depend on the tax bracket under which a particular investor falls. In some of the countries like the US, capital gains are taxed at both federal and state level.
For short term capital gains, the taxable amount is directly added to the income tax. However, the tax on the long term capitalgains is comparatively less if it is compared to the tax that is applicable on regular income. This can be attributed to the impact of inflation on the value of long term investments. Moreover, lower taxes encourage people to consider opting for long-term investments.
Some investors buy assets through tax deferred accounts, such as individual retirement account (IRA) and 401(k) plans.
Estimating capital gains and taxable amount is not easy, which is why it makes sense to keep the data related to all investments in an organized way.
