Capital Gains Tax: A Deep Dive
What is a Capital Gains Tax?
In the world of finance, a capital gains tax is imposed on the profit or gain that results from the sale of an asset. When you sell an asset for more than its cost basis (the price you originally paid for it), you have a capital gain. This gain is then subject to taxation by the government.
Short-Term vs. Long-Term Capital Gains
Capital gains are further classified into two categories: short-term and long-term:
- Short-term capital gains: These occur when an asset is sold within a year of its purchase. They are taxed at the individual's ordinary income tax rate.
- Long-term capital gains: These occur when an asset is held for more than a year before being sold. They are taxed at preferential rates, which are typically lower than the ordinary income tax rate.
Understanding the tax implications of capital gains is crucial for investors and individuals who engage in the sale of assets to make informed financial decisions and minimize their tax liabilities.
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