Taxable Gain

A taxable gain is a profit that results from the sale of any asset that is subject to taxation.

Taxable gains are the profits that an investor receives from selling an asset at a price higher than the cost basis of that asset. The U.S. Internal Revenue Service (IRS) considers an asset to be any property or investment not generally used in the conduct of an individual’s trade or business. A sale of an asset at a price higher than the individual’s basis will generally be subject to capital gains taxes. To calculate the taxable gain, an investor will take the difference between the sale price of the investment and the original purchase price, or cost basis. Cost basis refers to the original cost of the asset, adjusted for tax purposes to account for reinvested dividends or capital gains distributions.

For tax purposes, the IRS differentiates between short-term and long-term gains. A sale of assets held longer than one year will generally be subject to long-term capital gains taxes and that tax rate will be lower than the short-term tax rate. The IRS collects the ordinary income tax rate for short-term capital gains. This discrepancy between the short-term and long-term rates has led to a debate about the fairness of U.S. tax policies. Many commentators believe that a low long-term capital gains rate favors wealthy individuals, especially those who can structure their compensation as capital gains and dividends rather than regular salary. Others have argued that capital gains taxes are inherently unfair because they are a form of double taxation. A second argument against high capital gains rates holds that lower rates encourage overall investment while they foster economic growth and tax revenues.

Perhaps to counteract this inequity, capital gains taxes have been structured to take a lighter toll on lower-income investors. Long-term capital gains taxes were temporarily eliminated for low- and moderate-income investors after the Great Recession of 2008. The American Taxpayer Relief Act of 2012 made this change permanent with a tiered long-term capital gains structure that imposed no investment tax on taxpayers below the 25-percent income tax bracket.

Taxpayers can offset the tax burden of investment gains by claiming investment losses on their annual returns. The IRS allows individuals to deduct capital losses up to $3,000 over the amount of their capital gains. In some cases, investors can use capital losses beyond that limit in future years.

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