The History of Capital Gains Tax

Capital gains tax is imposed on profits remitted from the sale of assets. The tax is always charged when you sell an asset that’s in your possession. The tax can also be offset by capital losses. Some examples include capital gains tax on real estate or capital gains tax on stock and bonds that you had in your possession. In order for you to achieve capital gains, the selling price must be higher than the acquisition price.

Types of Capital Gains Tax

Short-Term Capital Gains Tax

This is a tax that is imposed when your assets are disposed within a period of 12 months. Basically, this tax is regular and is in line with the regular income tax rate. For the tax to take effect, the asset should have been disposed of at a profit. If any losses were incurred, they should be used to offset the capital gains tax.

Long-Term Capital Gains Tax

This is a tax that is imposed on investments that are held over longer periods of time, usually over 12 years. The tax is subject to change. For example, if the asset range lies between 10-15 percent, the person pays zero tax rate. However, if they exceed these figures, they are taxed 20 percent of the capital gains that are remitted.

There are various measures that you can implement in order to minimize the tax imposed. You can hold assets for longer periods of time ensuring that you dispose of those assets when the time is right for you to gain higher capital gains. Alternatively, you can dispose of the assets when the income is low, using the capital losses to offset the gains enabling you to cope with the tax.

Brief History of Capital Gains Tax

Before 1913, all the government revenue came from alcohol and cigarette taxes. Tax revenue tax imposed during those days ranged from 15-73 percent. However, in 1922, the tax was cut to 12.5 percent, which led to the stock market crash. Later on, the tax was hiked to an average of 40 percent in the 1940s, a situation that led to the revenue act of 1942. Although in 1979, the tax rate was cut to 28 percent to offset high-interest rates. It led to the implementation of the recovery act of 1981. The tax reform act of 1986 reduced the income tax from 50 to 28 percent. Just recently, Obamacare taxes added 3.8 percent tax on some long-term capital gains for investors whose income exceeded $200,000 a year.

Impact of Capital Gains Tax

Short-term capital gains tax has a higher tax rate compared to long-term capital gains tax. This is to discourage short-term trading. Long-term investments encourage investment in the stock market, real estate, and different assets that stimulate market growth. In addition, these investments create income inequalities because other people have to work hard for a meager salary while others enjoy huge payouts from capital gains. Furthermore, investors that rely on long-term capital gains benefit more from the relaxed terms of the tax rate. This scenario creates a gap between them and those engaging in short-term trading. Short-term traders are taxed heavily on their depleted assets compared to the long-term gainers.

Capital gains tax can be viewed as a source of revenue for the Federal government, which is the main regulatory authority in the management of the tax. The tax taps into all the assets that are traded by investors, tapping into a source of income that was not previously available. It’s important that you comply with the tax regulatory body in order to ensure that you don’t get into trouble when trading equities. You don’t want to be charged for tax evasion since it can ruin your reputation and business. The tax revenue generated from the asset values is subject to change, depending on how the economy is faring. In case of a global crisis, they are not dependable because most are offset through capital losses. It’s critical to analyze all the important notes in order to prepare your tax returns.