Another tax season has passed, I wan to say from the outset that I am not totally against paying taxes.  The government does provide some services that we could not do on our own, like protect us from enemies, both foreign and domestic etc.  I am however a conservative, I don’t believe in enlarging the federal government even bigger than it is and wish that the federal government was a little more fiscally  responsible.

What is the capital gains tax?

 If you are new to investing you may not have figured the capital gains tax into your investing strategy.  Wikipedia says the capital gains tax is, “a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price.  The most common capital gains are realized from the sale of stocks, bonds, precious metals and property.”  Not every country has a capital gains tax and most have different tax rates for individual investors and corporations.

 That means if you make money they want a portion of your earnings.  For most of this report I will deal more specifically with the United States, if you live in a different country, you should check out what is required in your country.

Calculating the capital gains tax

Price sold  -  purchase  x  your tax percentage  =  Capital gains tax   (side note:  You only pay capital gains tax after you sell the asset)

Looks simple right?  The purchase price is fairly easy to calculate when you are dealing with stocks or other securities.  It’s cost basis is simply the price that you paid for the security, when you originally purchased it.  If you happen to inherit the investment the cost basis would be the value of the investment on the date that the original owner died. This information was obtained from the following source link   InvestorGuide]. 

Now comes the fun part, your tax percentage, in the United States it will vary based on a couple of different factors. The percentage rate for your capital gains tax is affected by how long you have owned the asset.  You will be taxed more if you have owned the asset for the short term, or less than a year.  If you declare a short term gain you will be taxed at the maximum amount for your particular tax bracket.  As you can see in the following bracket. 

Subject to change based on changes to tax codes.  Current as of 2010

Obviously you will end up paying less of a penalty if you are making investments for the long term.  You need to keep in mind the amount of profit you will make on your short term investments because of the capital gains tax you will make less money on your investment, but it still may be worth it.

Now obviously you need to know what tax bracket you are in for determining the amount of tax paid.  The more money you make in a year the more you are penalized, especially in the short term.  There is an excellent calculator for this, that I recently came across that can help you determine this.  You simply plug in a few details and then it will tell you your tax bracket, if you don’t already know.  Below is a sample and you can click on the link below the graph to go to it’s site. 

http://www.moneychimp.com/features/tax_brackets.htm

 I hope you found this information useful.  Now go and invest, and don’t forget to pay your taxes.