Capital Gains Tax: What Is it?
Investors strive to find ways to maximise. This refers to the profits made when you sell your investment, but once the taxable assets have been “realised,” then you get capital gains when its tax rate is applicable to the dividends you make.
Understanding the Basics of Capital Gains Tax
All your unsold investments are referred to as “unrealised capital gains,” but once you manage to sell your assets, they will be “realised” and the capital gains tax will be enforceable. The rates vary from 0, 15, to 20 per cent, all of which depend on the tax bracket for each taxpayer. Here is a table to help you understand what your long-term capital gains will look like for 2021:
Capital Gains Tax Rate - 0%, 15%, 20%
Taxable Income for Single Taxpayers - Up to $40,400, $40,401 to $445,850, $445,851 or more
Taxable Income for Married Taxpayers, Filing Separately - Up to $40,400, $40,401 to $250,800, $250,801 or more
Taxable Income for the Head of the Household - Up to $54,100, $54,101 to $473,750, $473,751 or more
Taxable Income for Married Taxpayers, Filing Jointly - Up to $80,800, $80,801 to $501,600, $501,601 or more
Keep in mind that the capital gains tax rate only applies to sold investments that were under your control for more than a year for that financial year. This is called a long-term capital gain, while assets held for less than a year are short-term capital gains.
Short-term capital gains will be taxed as an ordinary income, which is essentially higher than the rate for long-term capital gains. With that in mind, investors are encouraged to hold their investments for longer than a year to save on taxes as the capital gains tax rate will be significantly lower as a form of incentive.
Do You Tax All Capital Gains?
It’s true that sold assets will now have capital gains tax, but there is a yearly exemption of £12,300 for 2021/22 as it falls within the tax year. However, getting an excess amount from your capital gains will be taxable, and you will have to use the extra within the current tax year or risk losing the allowance as it cannot be carried over to the new tax year.
The Bottom Line: A Brief Overview on Capital Gains Taxes
Capital gains taxes act as a form of incentive for investors as it facilitates business growth in more ways than one.
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