U.S. Capital Gains: An Introduction

An introduction to U.S. Capital Gains for international clients.

I.Introduction to the U.S. Capital Gains System
Economists specify a capital gain as the distinction between the price gotten from selling a possession and the rate paid for that asset. A capital gains tax (CGT) is a tax used on the gains understood from offering a non-inventory property. While the application of CGT is typically discussed in referral to the sale of stocks, bonds or property, it can be accessed on possessions as differed as a piece of art or rare-earth elements.

The U.S. capital gains tax structure distinguishes in between “long term capital gains” and “short term capital gains”. Tax payers (people and corporations) pay income tax on the net total of their capital gains like they do on other types of earnings, however, the rate applied to long term and short term capital gains differs. Long term capital gains are gains on assets held for over a year prior to sale. Long term capital gains are taxed at an unique long term capital gains rate. The appropriate rate is determined by which tax bracket the tax payer falls under. A taxpayer who falls into the 10 or fifteen percent tax bracket ($0-$34,000) pays a no percent rate on long term capital gains through 2012. If the taxpayer falls within the quarter tax bracket or greater ($34,000 or higher) long term capital gains are taxed at a rate of 15%. Short-term capital gains are gains on property held for less than a year. Brief term capital gains are taxed a higher rate and will depend on which tax bracket the taxpayer falls within. Brief term capital gains range from 10-35% depending on the taxpayers tax bracket.
Capital gains taxes are not indexed for inflation. Much of the gain associated with long held properties will likely be associated with inflation. The taxpayer pays tax on both the genuine gain and the illusory gain attributable to inflation. Thus, the real tax rate suitable to the gain is intrinsically tied to the rate of inflation throughout the years the possession was held.

II.U.S. Citizens and Citizens
The U.S. tax system is unique because it taxes residents and resident aliens on their worldwide income no matter where the income is derived or where the taxpayer lives. U.S. residents and resident aliens are for that reason required to file and pay (based on foreign tax credits) capital gets taxes on around the world gains from the sale of capital. While numerous offshore banks market their accounts as being tax havens, U.S. law requires citizens and resident aliens to report any gains stemmed from those accounts and the failure to do so totals up to tax evasion. The IRS does permit defer some capital gains taxes through making use of tax planning techniques such as an ensured installment sale, charitable trust, private annuity trust, installment sale and a 1031 exchange.

III. Noresidents and Nondomiciliaries
Nonresidents who are not taking part in a trade or company in the U.S. and have not lived in the U.S. for durations aggregating 183 days throughout a given year can generally escape capital gain tax completely. For instance, U.S. capital gets taxes are usually inapplicable to gains stemmed from the sale or exchange of personal effects offered the individual has not participated in a service or trade in the U.S. and has not lived in the U.S. for an aggregated 183 days. Gains related to portfolio interest paid to foreign investors and interest on deposits generally prevent capital gain taxes presuming an absence of trade or company in the U.S.

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