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What is capital gains tax?

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Quick Answer

A capital gains tax is the tax levied when an investor sells a capital asset for more than the original purchase price. While the asset is held by the investor, no tax is charged as it only applies when the asset is sold.

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What is capital gains tax?
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Full Answer

Capital gains taxes affect both individuals and corporations. In the United States as of 2015, these investors aren't automatically required to pay taxes upon the sale of assets, even when a profit occurs, as this tax is assessed on a yearly basis. If an investor sells an asset, such as bonds, stocks, property or precious metals for a profit but sells another at a loss, the difference between the two prices can offset each other.

Most individuals and corporations pay regular income tax rates on the net total of all short-term capital gains, though some exceptions exist, according to the IRS. Long-term capital gains on assets held for over a year are generally not taxed above 15 percent, and those who fall in the 10 to 15 percent ordinary tax brackets. As of 2013 and later, those in the 39.4 percent tax bracket must pay 20 percent on net capital gains. When an investor sells 1,202 qualified small business stock or collectibles, a 28 percent maximum tax rate applies.

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