Capital gains

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Mortgage Dictionary -> Capital gains

Capital gains are the profits of the sale on assets that were bought at a lower price and sold for more. Commonly, capital gains are earned on property, bonds and stocks. A capital gains tax is the tax that is charged on capital gains. Not every country in the world implements a capital gains tax, however, both Canada and the United States do.

In Canada, the current capital gains tax rate is at 50%. There are exceptions, however. If you're interested in finding out the tax rate for capital gains you intend to realize, it's best to contact your accountant or tax attorney.

To get a good idea of how taxes work on capital gains, let's say the profit you've realized is $100. 50% of that, or $50, would be taxed at your marginal tax rate. If your marginal tax rate was 43%, your capital gains tax would be $21.50. Therefore, you would be left with $78.50. If you've experienced capital losses (the opposite of capital gains) within the past three years, you may use these to offset capital gains tax paid during those years.

In the United States, income tax is paid on the net amount of their capital gains, much the same way they pay income tax on other sources of income. However, the tax rate that capital gains are taxed is not the same as the tax rate for ordinary income. Because of this, US citizens are encouraged to make investments to realize capital gains. Just as in Canada, the amount that a taxpayer in the United States is taxed on capital gains is related to his tax bracket and the time he held his investment before selling it and realizing a capital gain. If an investment is held for a year or less before being sold, it is considered to be a short-term capital gain and is taxed at the ordinary income tax rate. However, if the investment is held for over a year before being sold, it is a long-term capital gain and is taxed at a lower rate. Even if a US citizen realizes capital gains from a foreign investment, he is required by the US government to report the income. Failure to do so may result in him being charged with tax evasion.