Thursday, February 19, 2009

What is Capital Gains Tax

Capital Gains Tax is levied on any asset which you may liquidate or sell for profit. The asset could be anything from a property, fixed deposits, bonds, stocks etc. Capital Gains Tax is taken as a net income during financial assesment and any capital gain comes under the purview or being taxed. Basically there are two types of Capital Gains.

  1. Long Term Capital Gains. They are capital gains which are made by holding any asset of more than a year before selling to make a profit. For example, you could own 100 shares of xyz corp. and sell the 100 shares for a net profit after 1 year. Then the capital gains through this transaction would be taxed under Long Term Capital Gains Tax. At present IRS Long Term Capital Gains Tax rate is 15% if you are in the 25% income bracket and only 5% if you in less than 25% income bracket.
  2. Short Term Capital Gains. Any capital gains made by selling an asset within 1 year of purchasing that asset is classified as Short Term Capital Gains. IRS has prescribed a rate of full 25% on any Short Term Capital Gains.

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