What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax levied on the profit generated from the sale of assets or investments. When an individual sells an asset, such as real estate, stocks, or bonds, the gain is considered capital if the asset was held for investment purposes, rather than for resale as part of a business.
CGT is calculated by taking the difference between the selling price and the original purchase price (also known as the basis). If the sale price exceeds the basis, then a capital gain is realized. Conversely, if the selling price is lower than the basis, a capital loss occurs, which may be used to offset capital gains in certain instances.
There are two types of capital gains: short-term and long-term. Short-term capital gains apply to assets held for one year or less, while long-term capital gains apply to assets held for more than one year. Typically, long-term capital gains are taxed at a lower rate than short-term gains, reflecting the government’s incentives for long-term investment.
It's essential for investors to understand their potential tax liabilities, as this can significantly affect their net returns. Tax laws vary by jurisdiction, so consulting a tax professional for personalized advice is recommended.