Welcome to
"StockBreakthroughs Newsletter"
February 24, 2005.
In this issue...
In many countries, a capital gains tax is charged on capital gains, which is the profit realised on the sale of an asset that was previously purchased at a lower price. In our case capital gains are realized from the sale of stocks and options.
UNITED STATES:
In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate is lower for "long-term capital gains",
which are gains on assets that had been held for over one year before
being sold.
The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate.
In 2013 these reduced tax rates will revert back to the rates in effect
before 2003, which were generally 20%.
Technically, a "cost basis" is used, rather than the simple purchase
price, to determine the taxable amount of the gain. The cost basis is
the original purchase price, adjusted for various things including
additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.
Exemptions from capital gains taxes (CGT) in the United States include:
- Every two years, an individual can exclude up to $250,000 ($500,000 for a married couple) of gains on the sale of their primary residence.
- If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year.
CAPITAL GAINS TAX HOLDING PERIODS:
The total capital gains tax you pay is largely determined by the amount of time you held an investment. Although the individual tax rates are apt to change, the holding periods generally are not.
Capital gains tax on assets held less than one year:
Assets sold for a gain after being held for less than a year receive the least favourable capital gains tax treatment. Generally, the gain will be taxed at your personal income rate which includes your earned income plus capital gains. In some cases, the capital gains tax can almost be twice as high as that on long-term investments.
Capital gains tax on assets held more than one year but less than five years:
The Internal Revenue Service (IRS) considers assets held longer than one year to be long-term investments. In recent years, the capital gains tax on these types of holdings has been 20%. If you are in the 15% tax bracket, however, you may be eligible for a lower tax rate.
Capital gains tax on assets held for more than five years.
Assets purchased on or after January 1, 2001 that are held for five years or longer are subjected to a reduced capital gains tax rate of 18%.
UNITED KINGDOM:
Individuals who are residents in the United Kingdom (and trustees of various trusts) are subject to a capital gains tax, with exceptions for, e.g, prinicipal private residences, holdings in ISAs (Individual Savings Account) which is a financial product available in the UK, designed for the purpose of investment and savings with a favourable tax status, or gilts which is a government bond issued by the UK government or treasury usually on their behalf by the Bank of England.
Every individual has an annual capital gains tax allowance. Gains below the
allowance are exempt from tax, and capital losses can be set against capital
gains in other holdings before taxation.
Individuals pay capital gains tax at their highest marginal rate of income tax but since 6 April 1998 have been able to claim a taper relief which reduces the amount of a gain that is subject to capital gains tax (reducing the effective rate of tax), depending on whether the asset is a "business asset" or a "non-business asset" and the length of the period of ownership.
GERMANY:
Stocks sold for a gain that are held for one year and longer are exempted from capital gains tax.
Stocks that are sold for a gain before the one year holding period are subjected to capital gains tax according to the highest tax bracket the individual is in.
So if an you earn say, €100,000.- per year and made a capital gain on your investment of €10,000.- your will be taxed on €110,000.- according to your tax bracket.
Losses within the one year holding period are tax deductible.
Every individual has an annual capital gains tax allowance. Gains below the allowance are exempt from tax, and capital losses can also be set against capital gains.
Now it is impossible for anyone to know all the tax laws for every country. So if you have any other questions on this subject or if you do not live in one of the 3 countries above, then simply contact the revenue service of the country you live in and ask them what capital gains apply to you.
Yours in Successful Trading,
Ricky Schmidt
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