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Main Dictionary C

Capital Gains Tax

Capital gains tax is a tax on income of individuals and legal entities levied on realized capital gains.

Capital Gains Tax explained

Income from capital assets is subject to the respective income tax in almost all European countries. In order to secure the tax claim, the income tax due on the investment income is often collected directly at source by means of a capital gains tax. The payer withholds it for the recipient and transfers it to the tax authorities. Even if investment income is not subject to capital gains tax, such as interest from personal loans, this does not mean that it remains tax-free. The recipient must declare the investment income in his tax return.

Not all income from the transfer of assets is transfer income, and the following income is not included in transfer income:

  • Income from the transfer of inventories and other income from the transfer of assets continuously conducted for profit

  • Income from business income if the business is operated on a business scale, otherwise, it is included in miscellaneous income.

  • Income from harvesting or transferring forests

  • Included in income from forests.

  • Income from the transfer of monetary claims is also included in business income or miscellaneous income, although it does not fall under the category of transfer income.

Income from the transfer of movable property for daily use (furniture, fixtures, commuting cars, clothes, and other movable property normally necessary for daily life) is, in principle, exempt from taxation.

Capital Gains Tax rates

The capital gains tax rate on income for most individuals does not exceed 15%. Сapital gains tax can equal zero in case of your taxable income not exceeding $78,750. A 15% capital gains tax rate applies if your taxable income is $78,750 or more, but less than $434,550 for singles; $488,850 for spouses filing tax returns together or for qualifying widow; $461,700 for the primary breadwinner or $244,425 for spouses filing tax returns separately.

There are several exceptions in which capital gains may be taxable at a rate higher than 20%:

  • The taxable portion of capital gains from the sale of small business stock that qualifies under Section 1202 is taxable at a maximum rate of 28%.

  • Capital gains from the sale of collectibles (such as coins or works of art) are taxable at a maximum rate of 28%. 

  • The portion of any capital gain from the sale of real property which qualifies under Section 1250 which exceeds the immediate depreciation is taxable at a maximum rate of 25%.

Consequences of Capital Gains Tax

The capital gains tax raises cash for the government, but decreases investment (by lowering the ultimate rate of return). There were multiple proposals on how to change the tax itself in order to convert the situation in other ways. However, all of them have different consequences. One of the examples is that the tax rate increase would be more likely to deter investment in assets, but would seem to attract more money for the government. 

Another economic effect that could cause revenues to be different than projected is the U.S. competition for capital with other countries. With the changes in rate of the capital gain, more foreign investors will be encouraged by the U.S. to invest abroad.

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