Capital Gains Taxation in the United States
The United States Internal Revenue Code (IRC) defines capital gains as the profit realized from the sale or exchange of capital assets. Capital assets include most types of property held for investment or personal use, such as real estate, stocks, bonds, and collectibles.
The IRC distinguishes between short-term and long-term capital gains based on the holding period of the asset. Short-term capital gains are taxed at ordinary income tax rates if the asset was held for one year or less. Long-term capital gains are taxed at preferential rates if the asset was held for more than one year.
The formula for calculating taxable capital gains is as follows:
Capital Gain = Selling Price - Acquisition Cost - Expenses
Adjustments or deductions may be allowed in the calculation of the gain, including expenses related to the sale (e.g., brokerage fees, legal fees) and any improvements made to the asset during ownership.
The tax rates applicable to capital gains vary depending on the taxpayer's filing status and the type of asset sold. For individuals, the long-term capital gains tax rates are 0%, 15%, and 20%. For corporations, the long-term capital gains tax rate is 21%.
The IRC contains several provisions that outline the taxation of capital gains, including:
- Section 1221 defines capital assets and excludes certain types of property from capital gain treatment.
- Section 1222 provides the formula for calculating the basis of property, which is used to determine the amount of gain or loss realized on the sale of the property.
- Section 1231 allows certain types of gains and losses from the sale of business property to be treated as capital gains or losses.
- Section 1250 provides special rules for the taxation of depreciation recapture on the sale of real property.
The taxation of capital gains in the United States is designed to encourage investment and economic growth. The preferential tax rates for long-term capital gains provide an incentive for investors to hold assets for longer periods, which can lead to increased capital formation and job creation.
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