What is a Capital Gains Tax?

A capital gains tax is an amount of tax that becomes due when a capital asset generates some sort of profit. Gains can be realized when capital assets are sold for a higher price than was originally paid for the assets, or when the assets generate some sort of increased value, such as in the way of interest. The amount of capital gains tax is based on the increase in the worth of the asset, not in the total value, which would include the initial cost of acquiring the asset.

Because the capital gains tax is associated with the total amount of capital gains accrued by an organization, it is possible for an investor to offset the gains of one asset by incurring a loss on another asset. It is the total profits that are used to determine how much capital gains tax is due for a given period.

A capital gains tax can apply to any type of capital asset. In the event that properties such as land and buildings are sold at a profit, a capital gains tax will apply. The only exception to this rule is when the sale involves the principal home of the investor. A capital gains tax can also be applicable to such financial instruments as shares of stocks, various types of trust funds that generate annual revenue, and even the sale of antiques.

Depending on the country of residence, the exact rules that govern what assets are subject to a capital gains tax will vary. Many nations have implemented what is referred to as a capital gains tax exemption. That is, it is possible for the investor to realize a certain amount of capital gains from his or her holdings before any taxes will be considered due. Generally, the rate of this exemption is fixed at a level that is considered to make it possible for citizens with a modest income and a corresponding amount of profit from capital assets to incur little or no tax.