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Capital gains represent the increased value of an asset when it is sold. These gains are generally associated with investments such as stocks & funds, bonds, real estate, or something purchased for personal use like furniture or vehicles. It occurs when you sell an asset at higher prices than what you originally paid for.
The entire value earned from selling a capital asset is considered taxable income. To be eligible for taxation during a financial year, the transfer of a capital asset should take place in the previous fiscal year. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.
Capital gains are realized when you sell a capital asset by subtracting the original purchase price from the sale price. According to the Income Tax Act, assets received as gifts or by inheritance are exempted in the calculation of income for an individual.
Buildings, lands, houses, vehicles, mutual funds, and jewelry are a few examples of capital assets. Also, the rights of management or legal rights over any company will be considered capital assets.
The profit earned on the sale of an asset that has increased in value while it was owned. For example, if you purchased 200 shares of Amazon (AMZN) stock on January 30, 2020, at $500 per share. You then decided to sell all the shares on Jan 30, 2024, at $950 each. Assuming there were no fees associated with the sale, you realized a capital gain of $45,000.
Here’s how: [($500 x 100) – ($950 x 100)] = $45,000.
Any profit or gain that arises from the sale of a ‘capital asset’ is known as income from capital gains. These gains are typically realized at the time that the asset is sold and include the type of investments, such as stocks, bonds, real estate, shares funds, etc. Almost everything someone owns and uses for personal or investment purposes is a capital asset.
On the other hand, capital erosion is a term that refers to the loss of value or purchasing power of an asset or investment over time. It can be caused by various factors, including inflation, depreciation, taxes, fees, market fluctuations, or poor performance.
Capital erosion can have a significant impact on the financial health and goals of individuals, businesses, and governments. It can reduce the income, savings, and wealth of investors, as well as the capital available for reinvestment, growth, and development. Hence, it is important to avoid or minimize capital erosion if you have long-term financial goals.
Depending on the tenure of holding an asset, capital gains can be broadly categorized into the following types:
If an asset is sold within one year or less, then the profits earned from it are known as short-term capital gains. However, tenure varies in the case of different assets. For mutual funds and listed shares, Long-term capital gain happens if an asset is sold after being held back for one year.
The profit earned by selling an asset that you’ve held for more than one year is known as long-term capital gains. Capital assets such as land, buildings, and house property shall be considered long-term capital assets if the owner holds them for a period of 24 months or more (from FY 2017-18). However, it is not applicable for movable assets such as jewellery, debt-oriented mutual funds, etc.
The federal tax rate for your long-term capital gains depends on where your taxable income falls in relation to three cut-off points, as outlined below:
| Filing Status | Taxed at 0% | Taxed at 15% | Taxed at 20% |
| Single | Up to $47,025 | More than $47,025 but less than or equal to $518,900 | Over $518,000 |
| Married filing jointly and surviving spouse | Up to $94,050 | More than $94,050 but less than or equal to $583,750 | Over $518,000 |
| Married filing separately | Up to $47,025 | More than $47,025 but less than or equal to $291,850 | Over $291,850 |
| Head of Household | Up to $63,000 | More than $63,000 but less than or equal to $551,350 | Over $551,350 |
| Type of Asset | Holding Period for STCG | Holding Period for LTCG |
| Listed Equity Shares | 12 months or less | More than 12 months |
| Unlisted equity shares (including foreign shares) | 24 months or less | More than 24 months |
| Equity-oriented mutual fund units | 12 months or less | More than 12 months |
| Debt-oriented mutual funds | 36 months or less | More than 36 months |
| Immovable Assets (i.e.house, land, and building) | 24 months or less | More than 24 months |
| Moveable Assets (such as gold, silver, paintings, etc.) | 36 months or less | More than 36 months |
| Type of Asset | STCG Tax Rate | LTCG Tax Rate |
| Listed Equity Shares | 20% | 12.5% (no indexation benefit; exempted up to Rs. 1.25 lakh in an FY) |
| Unlisted equity shares (including foreign shares) | Income tax slab rate applicable to taxpayer income | 12.5% (without any benefit of indexation) |
| Equity-oriented mutual funds units | 20% | 12.5% (no indexation benefit; exempted up to Rs. 1.25 lakh in an FY) |
| Debt-oriented mutual funds | Income tax slab rate applicable to taxpayer income | 20% after indexation |
| Immovable Assets (i.e.house, land, and building) | Income tax slab rate applicable to taxpayer income | 12.5% (without any benefit of indexation) |
| Moveable Assets (such as gold, silver, paintings, etc.) | Income tax slab rate applicable to taxpayer income | 12.5% (without any benefit of indexation) |
Not all investments are eligible for the lower rates. The following are some assets that are and are not eligible.
| Eligible Assets | Not Eligible |
| Stocks | Business inventory |
| Bonds | Depreciable Business Property |
| Jewelry | Real estate used by your business or as a rental property |
| Cryptocurrency (including NFTs) | Copyrights, Patents, and Inventions |
| Homes and Household furnishings | Literary or Artistic Compositions |
| Vehicles | |
| Collectibles | |
| Timber | |
| Fine artworks |
The following are not included under capital assets;
The calculations of capital gains depend on the type of assets and their holding period. A few terms that an individual must know before calculating gains against their capital investments are here as follows:
When stock shares or any other taxable investment assets are sold, the capital gains, or profits, are referred to as having been realized. The tax doesn’t apply to unsold investments or unrealized capital gains. Stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.
Short-term gains occur on assets held for one year or less as these gains are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income (AGI). On the other hand, long-term capital gains are taxed at a lower rate than regular income.
Under current U.S. federal tax policy, the capital gains tax rate applies only to profits from the sale of assets held for more than a year, referred to as long-term capital gains. The current rates are 0%, 15%, or 20%, depending on the taxpayer’s tax bracket for that year.
Many taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. This gives them a financial incentive to hold investments for at least a year, after which the tax on the profit will be lower.
Day traders and others taking advantage of the ease and speed of trading online need to be aware that any profits they make from buying and selling assets held less than a year are not just taxed—they are taxed at a higher rate than assets that are held long-term. If the investor owns the profits of any investment for more than one year, long-term capital gains tax applies. However, if the investor owns the investment for one year or less, short-term capital gains tax applies.
Here’s a table to explain what is current corporate capital gain tax rate or individual capital gain tax rate is in different countries:
| Country | Headline corporate capital gains tax rate (%) | Headline individual capital gains tax rate (%) |
| United States (US) | 21% | 20% |
| United Kingdom (UK) | 25% | 10% or 18% |
| United Arab Emirates (UAE) | 9% | NA |
| Singapore | NA | NA |
| Australia | 25% | 45% |
| India | 15% or 20% | Long-term capital gain:10%Short-term capital gain:15% |
| Brazil | 15% to 22.5% | 22.5% |
| China | 25% | 20% |
| Germany | 29.9% | 25%, plus 5.5% solidarity surcharge on tax paid (in total 26.375% plus church tax if applicable) |
| France | 25% | 30%, plus exceptional income tax for high earners at 4% |
If you want to invest money and make a profit, you will owe capital gains taxes on that profit. Below, we’ve listed a number of perfectly legal ways to minimize your capital gains taxes:
Capital gains are classified into two categories: short-term or long-term, depending on the holding period. Short-term gains are defined as gains realized in securities held for one year or less and are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term gains are defined as gains realized in securities held for more than one year and are usually taxed at a lower rate than regular income.
The IRS (Internal Revenue Service) defines a net capital gain as the amount by which net long-term capital gain (long-term capital gains minus long-term capital losses and any unused capital losses carried over from prior years) exceeds net short-term capital loss (short-term capital gain minus short-term capital loss). A net capital gain may be subject to a lower tax rate than the ordinary income tax rate.
A capital gain or loss is the difference between what you paid for a capital asset (like bonds, mutual funds, ETFs, real property, or stocks) and what you sold it for. If you sell your investment assets (for example, assets that make investment income, such as dividend-paying stocks) for more than you bought it, you’ll have a capital gain — and vice versa, if you sell the asset for less than you bought it, you’ll have a capital loss.
Capital gains are the profits that are realized by selling an investment, such as stocks, bonds, shares, or real estate. Capital gains taxes are lower than ordinary income taxes, providing tax advantages to investors over wage workers. Based on the holding term and the taxpayer’s income level, the tax is computed using the difference between the asset’s sale price and its acquisition price, and it is subject to different rates.
