Results for capital gain

On this page:

Dictionary:

capital gain

The amount by which proceeds from the sale of a capital asset exceed the original cost.

#SearchBtn{margin-top:14px !important;}

Library

Investment Dictionary: Capital Gain

1. An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to its purchase price.

2. Profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place

Investopedia Says:
1. Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy.

2. Tax conscious mutual fund investors should determine a mutual fund's unrealized accumulated capital gains, which are expressed as a percentage of its net assets, before investing in a fund with a significant unrealized capital gain component. This circumstance is referred to as a fund's capital gains exposure. When distributed by a fund, capital gains are a taxable obligation for the fund's investors.

Related Links:
Investors would be wise to consider the impact of the government's cut on their returns. Learn ways to minimize it. A Long-Term Mindset Meets Dreaded Capital-Gains Tax
Learn how the newest tax laws apply to the proceeds you earn. Will Your Home Sale Leave You With Tax Shock?
Learn some tips on how to exit a position to the best of your advantage. To Sell Or Not To Sell
Tax-loss harvesting can help you to reduce taxes on your portfolio gains, but make sure you know the rules! Selling Losing Securities For A Tax Advantage
Learn how to narrow down your list from thousands of choices. Picking The Right Mutual Fund
Tax loss carry-forwards can help reduce the tax burden of owning a profitable fund. Seek Out Past Losses To Uncover Future Gains
If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer. Smart Real Estate Transactions
If palm trees and exotic holiday locations excite you, these properties may be for you. Investing In A Vacation Home
Learn how a change in leadership could mean more taxes for you. Will A New Fund Manager Cost You?
Learn about a strategy that could help you reduce taxes, diversify your portfolio and generate income. Saving Money With A Private Annuity Trust
From sales tax deductions to credit reports, check out what items should be on your financial checklist. Don't Put Off Your Year-End Plan

Financial & Investment Dictionary: Capital Gain

Difference between an asset's adjusted purchase price and selling price when the difference is positive. A long-term capital gain is achieved once an asset such as a stock, bond, or mutual fund has been held for more than 12 months. Such long-term gains are taxed at a maximum rate of 15%. Those in the 15% tax bracket pay a 5% tax on long-term capital gains. Selling assets for a profit after holding them for 12 months or less generates short-term capital gains, which are subject to regular income tax rates. Assets purchased starting January 1, 2000 and held for more than five years qualify for a maximum capital gains tax rate of 8%. Capital gains are reported on Schedule D of a tax return.

Insurance Dictionary: Capital Gains

Excess of the sales price of an asset over its book value. Listed as part of the Annual Report in the summary of the surplus account and/or in the Summary of Operations.

Banking Dictionary: Capital Gain (or Loss)

Difference between selling price of an asset and its cost when purchased. If the difference is positive, a gain is realized; if negative, a loss results. Long-term capital gains are taxed a maximum rate of 20% for taxpayers in the 28% tax bracket or higher, and at 15% for those in the 15% tax bracket, according to the 1997 Taxpayer Relief Act. Assets purchased after January 1, 2000 and held at least five years qualify for a maximum capital gain tax of 18% for those in the 28% tax bracket, and 8% for those in the 15% tax bracket.

Real Estate Dictionary: Capital Gain

Gain on the sale of a Capital Asset. Beginning May 6, 2003, the maximum individual tax rate on long-term capital gains is 15%. Deduction of Capital Losses against ordinary income is limited.
Example: Collins purchases land, for investment purposes, for $100,000. Some 13 months later she sells it for $140,000. She reports the $40,000 profit as a long-term capital gain on her income tax return.

Small Business Encyclopedia: Capital Gain/Loss

A capital gain or loss results from the sale, trade, or exchange of a capital asset. Simply stated, when the resulting transaction nets an amount lower than the original purchase value, or basis, of the capital asset, a capital loss occurs. When the resulting transaction nets an amount greater than the basis, a capital gain occurs. Capital gains and losses can either be short-term (when the transaction is completed within one year) or long-term (when the transaction is completed in more than one year). The period is determined from the day after acquisition of the asset to the day of its disposal. Capital gain/loss is a concept that affects small business owners in a number of ways—from the decisions they must make regarding their personal property and investments to the attractiveness of their businesses to outside investors. The factors relevant to capital gain/loss are the capital asset, the transactional event, and time.

The subject of capital gain/loss causes much debate in government and economic circles. The current philosophy centers on the benefits and efficiencies of capital accumulation and utilization. To encourage capital formation and investment, the federal tax codes tax capital gains at lower rates than ordinary income. In 1997, the maximum tax rate on a long-term capital gain was lowered from 28 percent to 20 percent (compared to maximum income tax rates of 31 percent, 36 percent, and 39.6 percent). A lower capital gains tax is supposed to encourage people to sell stock and other assets, which increases the government's tax revenues. In the past, it has also had a beneficial effect on investment in small businesses, as they tend to provide investors with income via an appreciation in stock price (which is taxed as a capital gain) rather than via dividends (which are taxed as ordinary income).

Capital Assets

Everything one owns for personal use, pleasure, or investment is a capital asset. These include: securities, a residence, household furnishings, a personal car, coin and stamp collections, gems and jewelry, and precious metals. Since property held for personal use is considered a capital asset, the sale or exchange of that property at a price above the basis thus results in a capital gain, which is taxable. If one incurs a loss on that property from a sale or exchange, however, the loss cannot be deducted unless it resulted from a personal casualty loss, such as fire, flood, or hurricane. Other types of property and investments also have some irregularities in their treatment as capital gains or losses for tax purposes.

INVESTMENT PROPERTY, COLLECTIBLES, PRECIOUS METALS, AND GEMS. All investment property is also considered a capital asset. Therefore, any gain or loss is generally a capital gain or loss, but only when it is realized—that is, upon completion of the sales transaction. For example, a person who owns stock in a growing technology company may see the price of that stock appreciate considerably over time. For a gain to be realized, however, the investor must actually sell shares at a market price higher than their original purchase price (or lower, in the case of a capital loss). Section 1244 of the federal revenue code treats losses on certain small business stocks differently. If a loss is realized, the investor can deduct the amount as an ordinary loss, while he or she must report any gain as a capital gain.

SALE OF A HOME. The sale of a personal residence enjoys special tax treatment in order to minimize the impact of long-term inflation. For most people, a residence is the largest asset they own. While some appreciation is expected, residences are not primarily used as investment vehicles. Inflation may cause the value of a home to increase substantially while the constant-dollar value may increase very little. In addition, the growth in family size may encourage a family to step up to a larger home. To minimize the impact of inflation and to subsidize the purchase of new homes, the tax code does not require reporting a capital gain if the individual purchases a more expensive house within two years. In addition, individuals are entitled to exclude for tax purposes up to $250,000 and married couples up to $500,000 of capital gains from the sale of a home, provided they have lived in the home as a principal residence in two out of the previous five years. As of 2000, this exclusion was available to taxpayers every two years.

Determining the Basis

Capital gain/loss is calculated on the cost basis, which is the amount of cash and debt obligation used to pay for a property, along with the fair market value of other property or services the purchaser provided in the transaction. The purchase price of a property may also include the following charges and fees, which are added to the basis to arrive at the adjusted basis:

Sales tax.
Freight charges.
Installment and testing fees.
Excise taxes.
Legal and accounting fees that are capitalized rather than expensed.
Revenue stamps.
Recording fees.
Real estate taxes where applicable.
Settlement fees in real estate transactions.

The basis may be increased by the value of capital improvements, assessments for site improvements (such as the public infrastructure), and the restoration of damaged property. A basis is reduced by transactional events that recoup part of the original purchase price through tax savings, tax credits, and other transactions. These include depreciation, nontaxable corporate distributions, various environmental and energy credits, reimbursed casualty or theft losses, and the sale of an easement. After adjusting the basis for these various factors, the individual subtracts the adjusted basis from the net proceeds of the sale to determine gain/loss.

Net Gain or Loss

To calculate the net gain/loss, the individual first determines the long-term gain/loss and short-term gain/loss separately. The net short-term gain/loss is the difference between short-term gains and short-term losses. Likewise, this difference on a long-term basis is the net long-term gain/loss. If the individual's total capital gain is more than the total capital loss, the excess is taxable generally at the same rate as the ordinary income. However, the part of the capital gain which is the same amount as the net capital gain is taxed only at the capital gains tax rate, maximum 20 percent. If the individual's capital losses are more than the total capital gains, the excess is deductible up to $3,000 per year from ordinary income. The remaining loss is carried forward and deducted at a rate up to $3,000 until the entire capital loss is written off.

U.S. tax ramifications

See also: Capital gains tax

Under the United States Tax Code's section 1222, gain or loss from sale or exchange of a capital asset is a capital gain or loss. Per IRS Tax Topic 409, "Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account." If a person sells a capital asset for more than he or she paid for it, the gain is taxable. However, for personal-use capital assets, such as a personal automobile, a capital loss is not deductible.

Long term vs. short term

Generally, appreciated capital assets that are sold by an individual after being held more than one year (long-term capital gain) will be taxed at a maximum rate of 15%. For the sale of collectibles and small business stock, the rate of taxation for individuals is a maximum of 28%. Appreciated capital assets that are sold by individuals after being held less than one year (short-term capital gain) will be taxed as ordinary income, which rises as high as 39.6% in the U.S. progressive tax system. ^[1] Capital gains by entities taxed as corporations do not receive preferential treatment, and are taxed at a maximum rate of 35 percent. ^[2]

Realized vs. Unrealized

Capital gains can be either realized or unrealized. Realized capital gains occur when the actual sale or exchange of the asset returned more money than the purchase price (as adjusted for depreciation and other factors). Unrealized capital gains occur when it is known that the asset has appreciated in value, but the asset has not been sold yet; the gain is only potential.

In the United States, unrealized capital gains are not generally subject to income tax. There are, however, certain exceptions to this general rule. For example, dealers in securities are required to recognize income yearly on the appreciation of securities held as inventory. ^[3] Capital gains that are realized (and unrealized gains treated as realized under the special rules discussed above) are generally subject to tax, unless some provision of the code provides that those gains need not be currently recognized for tax purposes. Such provisions include, for example, an exclusion from gross income for the first $250,000 (or $500,000 in the case of married couples filing jointly) of capital gain realized on the sale of a principal residence. ^[4]

Capital loss offset

In taxation in the United States, capital gains are subject to capital gains tax, but if a taxpayer has suffered from capital losses in the same year, he can offset the gains with the losses to reduce his taxable income. If the losses exceed the gains, then up to $3,000 may be deducted to offset federal tax on ordinary income each year. According to IRS Publication 550 [1] if you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains. Thus any remaining capital loss may be "Carried Forward" to the next year and claimed as a capital loss against both capital gains and up to $3,000 against income on that year's tax return etc. If part of the loss is still unused, you can carry it over to later years until it is completely used up, or until the death of the individual who incurred the loss.

Sale of principal residence

A capital gain on the sale of a principal residence is afforded special treatment for Federal income tax purposes. Married sellers of a principal residence may generally exclude up to $500,000 of gain ($250,000 of gain in the case of single individuals) from gross income, provided the real estate was used as the sellers' primary residence for at least two years during the five year period ending with the date of the sale.

Qualifications for the Preferential Tax Rates

To qualify for the preferential tax rates of §1(h) (Maximum Capital Gains Rate), an individual must have a “net capital gain,” which is defined in §1222(11) as the excess of net long-term capital gain over ‘net short-term capital loss.⁵ According to §1222(1)-(4), to have a net long-term capital gain, the taxpayer must have held the capital asset for more than one year.⁶

Preferential History of Capital Gains

1921: Congress limited the tax rate applicable to capital gains held for more than two years to 12.5 percents. The highest marginal rate for ordinary income was 73 percent.⁷
1934: Congress changed capital gain from a lower rate to a deduction so that the longer a taxpayer held a capital asset, the less the amount of gain was subject to taxation.⁸
1938: Congress reverted to taxing the entire gain at a preferential rate so while the maximum marginal tax rate on income was 81.1 percent, capital gains were only taxed at 15 percent.⁹
1942: The highest marginal rate for ordinary income grew to 91 percent and the rate for capital gains grew to 25 percent.¹⁰
1969: Congress returned to a deduction scheme, permitting taxpayers to exclude 1/2 their net capital gains. Taxpayers in the 70% bracket could limit their capital gains tax to 35%.¹¹
1978: Congress increased the deduction from 50 to 60 percent, allowing taxpayers in the highest tax bracket to incur a tax of 28 percent on their capital gains.¹²
1986: The Tax Reform Act of 1986 repealed all preferences for capital gains. The maximum tax rate applicable to ordinary income and capital gains was set at 28 percent.¹³
1990: Preferential rates for capital gains were restored when the maximum tax rate on ordinary income grew to 31 percent, because capital gains remained taxed at 28 percent.¹⁴
1993: The maximum rater applicable to ordinary income grew to 39.6 percent; but capital gains remained taxed at 28 percent.¹⁵
1997: Congress reduced capital gains tax rate to 20 percent and gave taxpayers in the 15 percent bracket a capital gains tax rate of 10 percent.¹⁶
2003: The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the tax rate for “net capital gain” from 20% to 15% and to 5% for taxpayers in the lower brackets.¹⁷
2008: The 5 percent capital gain tax for taxpayers in the lower brackets will be reduced to zero.¹⁸
2011: Absent further action by Congress, the capital gains rates will revert to their pre-2003 levels.¹⁹

Policy Reasons For and Against Preferential Rates for Capital Gains

Traditionally preferential rates for long-term capital gains were justified on the grounds of inflation, because it was thought that a preferential rate for long-term capital gains was necessary to accommodate for the hardships of taxing gains due to inflation instead of real economic growth.²⁰ A second rationale was that when the taxpayer sells the capital asset, all of the gains from the asset is bunched into the year of sale, so the taxpayer does not recognized this appreciation as it accrues and will be at a greater risk that the gain will be taxed at a higher rate.²¹ Another rationale is that keeping a low tax rate for capital gains will stimulate savings and investment by taxpayers.²² Finally, there is a belief that the lower rate may give a taxpayer an incentive to sell the capital assent instead of holding it until death so that they can receive a stepped-up basis for the taxpayer’s beneficiary.²³

The main policy opposition to preferential rates for long-term capital gains revolve around a belief that a better way exists to account for inflation.²⁴ Additionally, opponents of preferential rates for capital gains stat that since taxpayers usually control the timing of the realization event giving rise to the gain, bunching is far less of a justifiable rationale and that a lower tax rate for long-term capital gains gives an incentive for taxpayers to sell capital assets which may not be beneficial.²⁵

Other Countries where Capital Gains are taxable

India

There is currently no capital gains tax after a holding period of more than one year for equities. However, 10% of tax is applied for short term equity-shares gain. This is applicable only for transactions that attract Securities Transaction Tax (STT).

As of 2006, shares / equities are considered long term capital, if the holding period is one year or more. Long term capital gains are taxed either at 10% of earnings or 30% of (earnings - deduction based on inflation index).

Short term capital gains are taxed just as any other income and they can be negated against short term capital loss from the same business.

Many other capital investment ( home, buildings, real estate, bank deposits) are considered long term if the holding period is 3 or more years.[2]

United Kingdom

[3]

Notes

^ 26 U.S.C. 1
^ 26 U.S.C. 11 (2007)
^ 26 U.S.C. 475 (2007)
^ 26 U.S.C. 121 (2007)

5. Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 510.
6. Id.
7. Id. at 138-140.
8. Id.
9. Id.
10. Id.
11. Id.
12. Id.
13. Id.
14. Id.
15. Id.
16. Id.
17. Id.
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
23. Id.
24. Id.
25. Id.

References

This article or section needs sources or references that appear in reliable, third-party publications. Alone, primary sources and sources affiliated with the subject of this article are insufficient for an accurate encyclopedia article. Please include more appropriate citations from reliable sources.

For further information on U.S. capital gains, go to Tax Topic 409 at the IRS: http://www.irs.gov/taxtopics/tc409.html and Publication 550 at http://www.irs.gov/publications/p550/ch04.html#d0e11041

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Donate to Wikimedia

Join the WikiAnswers Q&A community. Post a question or answer questions about "capital gain" at WikiAnswers.

Copyrights:

		Dictionary. The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2007. Published by Houghton Mifflin Company. All rights reserved. Read more
		Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved. Read more
		Financial & Investment Dictionary. Dictionary of Finance and Investment Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved. Read more
		Insurance Dictionary. Dictionary of Insurance Terms. Copyright © 2000 by Barron's Educational Series, Inc. All rights reserved. Read more
		Banking Dictionary. Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved. Read more
		Real Estate Dictionary. Dictionary of Real Estate Terms. Copyright © 2004 by Barron's Educational Series, Inc. All rights reserved. Read more
		Small Business Encyclopedia. Encyclopedia of Small Business. Copyright © 2002 by The Gale Group, Inc. All rights reserved. Read more
		Economics Dictionary. The New Dictionary of Cultural Literacy, Third Edition Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil. Copyright © 2002 by Houghton Mifflin Company. Published by Houghton Mifflin. All rights reserved. Read more
		Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Capital gain". Read more

Search for answers directly from your browser with the FREE Answers.com Toolbar!
Click here to download now.

Get Answers your way! Check out all our free tools and products.

On this page: Print Link