Capital Gains Tax Law – What It Says!

What Does The Law Say?

August 15, 2004
By Niles Brohey

Capital gains taxes are applied to profits generated by the sale or exchange of assets like real estate, shares, businesses, or property. The capital gains tax is levied on any profits that are realized from selling these capital assets. Capital gains tax laws are often amended, they form a major part of the US budget and were mostly recently reformed in 2003 when long term rates fell by 5%. The IRS is charged with enforcing capital gains tax regulations.

The rate at which capital gains tax is charged depends on three important facts. The first is the income tax band you occupy. The second is how long you have had the asset being traded, and thirdly what the asset is (is it shares, or a business or maybe real estate?). So by balancing how long you hold onto the asset, and considering what type of assets you hold you can influence the rate charged on gains from its sale.

In the USA, profits from trading assets held for less than one year are taxed ts the same rate as your income is. The rate of tax on gains resulting from transactions on capital assets held for one year or more varies, depending on your income, from 5% to 15%. However certain assets pay a incur a flat rate of tax regardless of your income. The rate on the sale of collectibles is automatically 28% and a 25% tax rate is levied on the sale of real estate (with the exception of rental property).

Capital gains tax has a turbulent legal history. As far back as 1872 the US supreme court ruled that capital gains were not income. This made capital gains tax illegal. This ruling was overturned almost 50 years later making the tax legal again. In fact even today there is a sizable lobby looking to have the capital gains tax repealed. Their argument lies on the premise that capital gains are uncertain and as such cannot constitutionally be classed as income and taxed as such.

Even though capital gains tax reform and repeal have long been a stated goal of the Republican party, a full repeal of the tax is considered unlikely by most. Instead expect to see continuing cuts in the top rates of tax (long term capital gains tax rates dropped by 5% in 2003) and perhaps reform of the required holding times of assets.