Capital Gains Tax In The United States
In the United States of America, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. "Long term" capital gains are generally taxed at a preferential rate in comparison to ordinary income (26 U.S.C. §1(h)). The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, which are gains on dispositions of assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. The reduced 15% tax rate on qualified dividends and long term capital gains, previously scheduled to expire in 2008, was extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act of 2005 signed into law by President George W. Bush. This was extended through 2012 in legislation passed by Congress and signed by President Barack Obama on Dec 17, 2010. As a result:
- In 2008–2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets.
- After 2012, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.
- After 2012, the long-term capital gains tax rate will be 20% (0% for taxpayers in the 10% and 15% tax brackets).
- After 2012, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.
When the taxable gain or loss resulting from the sale of an asset is calculated, its cost basis is subtracted from the amount realized on the sale. The cost basis is equal to the purchase price, adjusted for certain factors such as fees paid (brokerage fees, certain legal fees, sales fees) and depreciation.
Read more about Capital Gains Tax In The United States: History of Capital Gains Tax in The U.S., Rationale
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