Capital Gains Tax
The realm of taxation is laced with several terms that are difficult to understand and can often confuse the taxpayer. One such term is capital gains tax. What is this tax levied on? Does all your assets acquired fall under this category? There are questions galore. But let us first understand what exactly capital gains tax is?
Understanding Capital Gains Tax
In very simple terms, it is a kind of tax that is levied on an individual or a corporation on any capital gains they might have earned. In other words, the profit that an investor gains after selling their investment or the capital assets at a higher price compared to what they bought these at.
However, capital gains tax is not applied on notional valuation. It is triggered only when the asset is sold by the investor, and the profit is realised. It cannot be levied if the investor continues to hold the capital asset. For example, you might own shares of a company ‘A’ and the returns every year are rising at a significant rate. But capital gains tax cannot be levied till these shares are sold, and you have pocketed the gains.
Where Is Capital Gains Tax Levied?
This is one form of taxation that varies from country to country but it is levied in most countries in a certain form in a way that the capital gains incurred by citizens are subjected to taxation on an annual basis. For example in US, capital gains tax is levied on an individual’s or a company’s annual net capital gains. However, investors must understand that net capital gains tax into account the difference between potential capital gains and capital losses incurred from all capital assets during the course of a year.
In most European countries, any financial instrument is subject to capital gains tax though the rules vary from country to country and region to region. On an average Capital Gains range between 24-33%.
Deferring Capital Gains Tax
However, taxpayers do have the option to defer the capital gains tax incurred by them by just postponing the date of sale of the capital asset. However depending on specifications in terms of the legal provisions in each country an individual can look at deferring the capital gains tax.
- Small businesses could have a lower rate of tax on the gains incurred.
- Many countries have the option of creating tax-favored accounts where you can let the gains accumulate for a certain period and tax when it is withdrawn.
- Tax loss or selling an asset at a loss now and creating a tax loss in the present can be used to offset capital gains from a future transaction.
- If the capital asset acquired is given to charity, the capital gains tax due on it can be waived off.
- Tax may be relinquished if the asset is given to a charity.
Capital gains tax if applied appropriately can help reduce one’s tax liability significantly on the capital assets acquired or invested in as in most cases it is observed that the long-term capital gains tax is significantly lower vs. average income tax for the particular period.