New capital gains tax law
Capital gain is the profit that we obtain from selling assets. The asset includes our property and bonds. It is also termed as income gained from investment in real estate as well as from stocks. Capital gains tax law is the tax implemented on the benefit from transaction related to capital assets. The New capital gains tax law is introduced to modify the old patterns of high tax on our investment. It is more beneficial and has low tax rate on our capital assets. So, the new regulations are more flexible and advantageous as compared to the previous rules related to capital gains.
Change in Tax Rate Over Investment Relating To New Holding Period:
Long-term gain - Under old law, maximum tax rate was 28 % and person has to hold asset for almost one year to avoid general tax rate of 39.8 %. New tax law has reduced tax rate to the highest 20%, but person has to hold asset for at least 18 months. It gives more benefit to low income tax payer with only tax rate of 10% on the investment. Long-term gain is also advantageous for capital assets sold on or after May 7 1997, and before July 29, 1997. The assets sold on these days have to pay tax rate of 20 % to 10 %. If the assets held for more than two years, but sold before May 7 1997, then tax rate chargeable would be 28 %.
Mid-term gain It is a new method introduced in the investment. It is applied on the assets, kept for almost 12 months but not exceeding more than 18 months. The tax charged on these assets is 28 %. The tax rate is applicable on the sale of the assets occurring after July 28, 1997. Short-term gain - It is not changed, and kept as it was before. Under Short- term gain, tax is charged on the asset held for less than one year with ordinary tax rate.
Five-year gain - This has been introduced on December 31, 2000. The assets purchased after this date for the period of five years have to pay tax rate of 18 %. For 15 % bracket taxpayers, 8% tax rate would be applicable in the beginning of 2001, instead of 10% on the assets held for more than five years, regardless of time of purchase.
Impact of holding period:
The following examples illustrate the change in periods of purchase and sell of capital assets, and the effects of the transaction over the investment
Suppose you brought the stock of $ 10,000 and sold it for $ 50,000, then you gain a profit of $ 40,000. If you are in tax 39.8 % bracket, then your holding will determine profit.
- If the holding period is of one year or less, the tax charged will be 39.8 %.
- If the holding period is of more than one year, but less than 18 months, then the tax rate will be 28 %.
- If the holding period of more than 18 months, tax rate applicable would be 20 %.
- Holding period of more than 5 years, tax deducted from investment will be 18 %.
Thus, it is clear that how the difference of the few months can affect the investments in capital assets. It advised to keep careful track of our purchase and sale dates in order to get more advantages through the new capital gain tax laws.
Other Articles
