👋🏼 everyone,
I've been stupid, naive and foolish (probably all of those things), but when I've considered investments in the past, I've been so focused on how much money I could make back on that investment over time that I haven't fully considered the tax implications.
With that in mind, let's explore capital gains tax.
(Quickly) explained…
Capital gains tax (CGT) is what you have to pay when something you own, called an asset, such as investments or property, goes up in value and you then sell it at a profit.
This means you have made capital and capital is just another word for money!
Simple example:
If you sell some shares anytime during 2023 and make a total profit of $150, you must report that $150 as a capital gain on your tax return for 2023.
🤓 What you need to know
Capital gains tax allowance
A capital gains tax allowance is the amount of profit from the sale of an asset that an individual is allowed to earn before they become liable to pay capital gains tax.
In many countries, such as the UK and the US, the capital gains tax allowance is an annual allowance that is set by the government. The amount of the allowance may vary depending on factors such as the type of asset being sold, the tax status of the individual, and other factors.
What do you pay capital gains tax on?
Firstly, the stuff you pay capital gains tax on has a fancier name than ‘stuff’ and that is ‘assets’. So if you hear people referring to assets, then remember it’s just the posh name for stuff :)
It may vary a little depending on what country you’re paying taxes in, but generally speaking, assets that you need to pay capital gains tax on are:
💍 Possessions (like jewellery) over a certain amount
₿ Digital assets e.g. cryptocurrencies and NFTs
🏘️ Property / real estate
📊 Stocks and bonds
🚜 Machinery
🏞️ Land
What is long-term capital gains tax?
🇺🇸 US specific
Long-term capital gains taxes are a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15% or 20%, depending on your taxable income. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.
What is short-term capital gains tax?
🇺🇸 US specific
Short-term capital gains taxes are a tax on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals your ordinary income tax rate, or your tax bracket. If you need a refresher on what tax bracket you’re in, review this rundown on federal tax brackets.
Tax rates (what you have to pay on your gains):
Again, these vary country-to-country, but here’s a recent snapshot firstly of Europe where we can see what the top capital gains tax rates on individuals are. And with this said, it’s also important to note that the tax can vary depending on the type of asset sold.
And here’s a look at the 🇺🇸:
So for folks in the US, in 2023, individual filers won’t pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
🕵️ How to calculate capital gains tax - helpful tools!
If you’re in the UK, use this simple tool from Taxscouts
If you’re in the US, you can use this tool from Smartasset which will help you calculate short and long term assets
Capital gains tax (🇺🇸)…in 01:06 mins
🇬🇧 Capital gains tax - 📹 explainer
🇮🇪 Capital gains tax - 📹 explainer
🇨🇦 Capital gains tax - 📹 explainer
And before I finish up, ever wondered what the likes of Monaco, Singapore and New Zealand have in common?
No capital gains tax 🙃
Thanks for reading and I really hope you learnt something from this - always love to hear feedback, so just hit the reply button to share your thoughts!
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.