How is Capital Gains Tax Calculated?
Capital gains tax (CGT) is a tax on the profit made from selling an asset. To calculate capital gains tax, follow these steps:
- Determine the Selling Price: The amount for which you sold the asset. This includes any additional costs that can increase the selling price, such as commissions or fees.
- Calculate the Cost Basis: The original purchase price of the asset. This can also include expenses incurred during the purchase like broker fees, closing costs, or improvements made to the asset.
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Calculate the Capital Gain: Subtract the cost basis from the selling price. If the result is negative, you have a capital loss rather than a gain.
Capital Gain = Selling Price - Cost Basis - Determine Holding Period: Identify whether the asset was held short-term (one year or less) or long-term (more than one year). Short-term gains are typically taxed as ordinary income, while long-term gains enjoy lower tax rates.
- Apply the Tax Rate: Based on your holding period and income level, apply the relevant capital gains tax rate to your capital gain. The rates can vary significantly by jurisdiction.
By following these steps, you can accurately calculate your capital gains tax obligation, ensuring compliance with tax regulations and optimizing your tax strategy.