Capital gains are earnings from the sale of an asset. These assets include stocks, bonds, real estate, equipment, intangible assets, or other property. There are new capital gains tax rates in 2013 for taxpayers. Following are the new rates:
Long-Term Capital Gains
Long-term capital gains refer to the profits earned when you sell an asset you have owned for at least one year. While short-term capital gains are taxed at the same rate as normal income, long- term capital gains have a lower tax rate than normal income. The government’s reasoning behind this is that lower tax rates for long-term gains promotes long-term investments. Critics of the capital gains tax argue that taxing investments will lead to less investment. Thus, it will lead to higher costs for companies to raise capital for new developments. Accordingly, fewer investors mean less-profitable companies and less wealth.While this may be going to the extreme, some people may indeed avoid purchasing an asset or investing in stocks in order to avoid capital gains taxes.
Short-Term Capital Gains
Short-term traders and investors have to pay a larger cut of their income than those who buy and hold. One way to pay no capital gains taxes is to never sell your asset or investment. As Warren Buffet once said in a 1988 letter to Berkshire Hathaway shareholders, “Our favorite holding period is forever.” In this statement, Buffett advises shareholders and investors that the ideal holding period is “forever” if you want to avoid paying the government capital gains taxes. This is ideal in theory, but most individuals don’t hold on to their asset or investment forever. With a long-term investment, take adequate time to analyze what you are investing in. How much are you paying? What kind of growth do you project over time? What will be the asset’s value in the long-run?
Exchange Traded Funds