This tax is imposed on capital gains realized from the sale of valuable assets such as stocks, bonds, real estate or other collectibles which have increased their prices while in the possession of the owners.
Key Features of Capital Gains Tax
- Rate of tax depends on type of asset disposed, holding period, and jurisdiction’s income tax laws
- Short-term gains face higher taxes if sold within 1 year while long-term profits receive preferential treatment
- Losses can sometimes offset other capital gains or ordinary income up to an annual limit
- Exemptions exist for primary residences and other qualified transactions
Example of Capital Gains Tax
An investor in equities chose to permanently surrender her highly appreciated stock positions, obligating recognition of six-figure capital gains liable to both federal and state taxation.
Key Takeaways
Understanding applicable capital gains tax rules proves vital for strategic portfolio planning and optimizing after-tax returns upon divesting successful investments. Proper documentation also ensures compliance with income reporting requirements.