Capital Gains tax is a federal tax penalty that is imposed on capital
accumulation, investment and productivity. Some of the income that is
subject to capital gains tax includes the sale of an investment, a
home, a family business, a farm or ranch or even a work of art. The
capital gains tax is applied on the difference between the price paid
for an item and the money received from selling it, or the capital gain.
The most common form of capital gain for people is the sale of their
corporate stock. The capital gains tax rate for individuals is
currently at one of its highest rates ever and is at 28% while the
corporate rate is at its greatest level in history, namely 35%. There
is an inequality with capital gains tax in the fact that people must
pay taxes on all of their gains but are only able to deduct a portion
of their losses.
This particularly applies to investments that fluctuate between gains
and losses over time.In many states taxpayers are liable, not only for
the federal capital gains tax but also the state’s own form of capital
gains tax. This can actually take the combined rate to almost 40%.
California, Montana and Rhode Island are amongst the highest in the
country.
For the government, the capital gains tax payment represent 6% of
personal and corporate income tax receipts and 3% of total federal
revenues. There is a lot of controversy surrounding the capital gains
tax that individuals and corporations have to pay but it actually
brings in much less revenue for the federal government than most people
would think. In fact, the total collections during the 1990s were
between $25 billion and $30 billion a year. In the USA, capital gains
are not indexed for inflation which means that the seller pays capital
gains tax on the real gain and also on the gain attributable to
inflation.
This is one reason that the capital gains tax is lower than regular
income tax rates. In other countries, such as the United Kingdom, the
capital gains tax rate is much higher (over 40%) but there it is
actually indexed to inflation. The difference between capital gains tax
and all other forms of federal tax is that it is basically a voluntary
tax. People can avoid paying any of the tax by simply not selling their
assets. This is becoming increasingly common, especially with the
uncertainty of the stock market, and the government estimates that
there is $7.5 trillion of unrealized capital gains which would all be
subject to capital gains tax if it was sold.
