“In this world, nothing can be said to be certain, except death and taxes”, said by Benjamin Franklin.
It’s true. Taxes are everywhere in our life. When you sell your property or stock shares and make some money from selling, you have to pay Capital Gains Taxes (CGT).
Not all your assets will be taxed by CGT. The capital gains tax only targets to your non-inventory asset, which includes stocks, bonds, precious metals, real estate and property. What’s more, the tax is triggered only when you sell, or “realize” them. For example, the stock shares you have that appreciate every year will not be taxed unless you sell them, no matter how long you hold them.
Capital gains also can be reduced. For example, if you sell a property for less than the purchase price, you lose some money. Your total capital gains minus your capital losses is called “net capital gains”. The net capital gains are taxed by the CGT.
The tax rate varies according to the time you hold the asset. Long-term capital gains tax targets assets held for more than a year. The rates are 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains taxes are for assets held for a year or less. Short-term capital gains taxes have higher rates, usually are the same of your ordinary income tax rate.
The CGT is facing some criticism. Some people think that capital gains tax and income tax constitute double taxation. Because the capital gains that need to be taxed actually result from the appreciation of the money that you have already paid income tax on.
Though with criticism, the capital gains taxes are inevitable. But don’t worry, there are ways to reduce the CGT. For example, you can put your money in 401(K), IRAs or other retirement plans that have tax advantages. The money you earn from investing in these accounts are exempt from capital gains taxes. The gains are seen as ordinary income. Also, you should be careful with your holding periods. Long-term capital gains taxes have lower tax rates.