Capital gains tax is owed when the sale price of a non-inventory asset is higher than the initial purchase paid to result in a realized profit. Capital gains tax is not incurred on inventory assets. The capital gain tax is usually a percentage of the profit earned from selling the assets. Once the asset is sold, then the capital gain is said to be “realized.” An asset that has increased in value but has not been sold is known as an unrealized capital gain. A capital gain tax can be a result of selling one’s home, stocks, bonds, commodities, mutual funds, business, and other similar capital assets.

Collectible assets are also subject to capital gains taxes. Many countries offer special tax rates just for collectibles. Collectible assets include the following:

• Gold, silver and other precious metals
• Fine gemstones
• Paintings and other fine arts
• Stamps
• Rare coins
• Rare rugs
• Antiques
• Alcoholic beverages

The first step to calculating the capital gain tax is by calculating exactly how much capital gain you’ve earned in the last year (it is imperative to pay capital gain tax every year). In order to this, subtract the original purchase price from the sale price of a capital asset (stock, real estate, etc.)

The original purchase of an investment price aka Cost Basis is the purchase price adjusted for improvements, depreciation, and other adjustment items. Basis can be considered as an adjusted purchase price. Basis involves receipts and numbers collected over a period of years. Accurately calculating the basis requires one to keep good records for the life of each asset. An individual must be able to identify all relevant information to accurately calculate the capital gains tax owed. It can be calculated in many ways:

• If an investment was bought by an individual, then the cost basis is the price paid during the purchase.
• If the investment was inherited by an individual, then the cost basis is the value of the investment on the date that the first owner died.
• If the investment was received as a gift, then the cost basis is the original price of the asset, unless the investment was worth less than that amount when it was given to the individual.

On figuring out how much has been earned from the sale of each asset, the next step is to figure out how long the individual has owned each asset. This is known as the holding period of an investment and is divided into three categories, each with a different tax rate:

Short-term investments: assets that are sold less than a year after they were purchased.

Long-term investments: assets that are held for at least a year before being sold.

Super-long-term investments: assets that were held for over five years after the original purchase. This category is only good for investments purchased after January 1, 2001.

The capital gains tax rates on short-term investments are most of the times higher than for long-term investments. The specific rates for each holding period depend on the type of asset that was sold. However, the most important factor that determines the capital gains tax rate of an individual is their income tax bracket. The higher the income tax bracket, the more payment incurred in capital gains tax. As a general rule, an individual pays capital gains tax at the same rate as income tax for all short-term investments.

For example, if a person is in the 10% income tax bracket, they will pay 10% for all short-term capital gains. And if they are in the 35% income tax bracket, they will pay 35% for all short-term capital gains.

In 2008 taxpayers in the 15%, income tax bracket or lower had to pay 5% on long-term capital gains. The rest had to pay a flat rate of 15%. Long-term rates were dropping to zero% for taxpayers in the 15% income tax bracket or lower, starting in the 2008 tax year.It is to be noted that there are some exceptions for long-term capital gains rates. The long-term rate for collectibles and small business stock held for more than five years is currently a flat 28% across all tax brackets. However, about real estate sales, the long-term capital gains tax is either 5% or 15% after any primary residence exclusions.

Calculating capital gains tax can be complicated. Not only is a lot of information required, but it is also subject to arcane and ever-changing tax laws. Fortunately, there are capital gains tax calculators available online that makes it easy to organize the data and complete the math.It is vital that one makes sure to seek the services of a well-qualified professional when calculating capital gains tax. The expert will guide you and help you to keep records while also giving financial advice on how to save money.