Capital Gains Tax

Capital gains tax is imposed on the profit made from selling a capital asset for more than its purchase price. This tax applies to the difference between the selling price and the original cost basis of the asset. Capital gains tax rates vary depending on whether the gains are short-term or long-term. Short-term capital gains, for assets held for one year or less, are typically taxed at the same rates as ordinary income. Long-term capital gains, for assets held for more than one year, benefit from lower tax rates, which can vary based on the taxpayer’s income bracket.

Certain exemptions and deductions can reduce capital gains tax liability. For example, profits from the sale of a primary residence may be exempt up to a certain limit, provided specific conditions are met. Investors also use tax-loss harvesting to offset capital gains with capital losses, reducing the overall tax burden. Understanding capital gains tax implications is crucial for effective financial planning and investment strategy.

1. An investor paying capital gains tax on the profit from selling shares of stock held for more than a year.
2. A homeowner selling their primary residence and benefiting from a capital gains tax exemption on part of the profit.
3. A business owner paying capital gains tax on the sale of a commercial property.