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 define a capital gain as the distinction between the price received from selling an asset and the rate paid for that asset. A capital gains tax (CGT) is a tax used on the gains recognized from offering a non-inventory possession. While the application of CGT is commonly gone over in recommendation to the sale of stocks, bonds or property, it can be accessed on properties as differed as an art piece or precious metals.

The U.S. capital gains tax structure separates between “long term capital gains” and “short-term capital gains”. Tax payers (individuals and corporations) pay income tax on the net overall of their capital gains like they do on other types of earnings, however, the rate applied to long term and short term capital gains varies. Long term capital gains are gains on properties held for over a year prior to sale. Long term capital gains are taxed at a distinct long term capital gains rate. The relevant rate is identified by which tax bracket the tax payer falls under. A taxpayer who falls under the 10 or fifteen percent tax bracket ($0-$34,000) pays a zero percent rate on long term capital gains through 2012. If the taxpayer falls within the quarter tax bracket or greater ($34,000 or greater) long term capital gains are taxed at a rate of 15%. Brief term capital gains are gains on property held for less than a year. Brief term capital gains are taxed a greater rate and will depend upon which tax bracket the taxpayer falls within. Brief term capital gains vary 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 assets will likely be related to inflation. The taxpayer pays tax on both the genuine gain and the illusory gain attributable to inflation. Thus, the real tax rate relevant to the gain is inherently connected to the rate of inflation during the years the asset was held.

II.U.S. Citizens and Citizens
The U.S. tax system is distinct because it taxes people and resident aliens on their worldwide income no matter where the income is derived or where the taxpayer resides. U.S. residents and resident aliens are for that reason needed to submit and pay (based on foreign tax credits) capital acquires taxes on worldwide gains from the sale of capital. While lots of overseas banks market their accounts as being tax havens, U.S. law requires residents 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 gets taxes through using tax planning strategies such as an ensured installation sale, charitable trust, private annuity trust, installment sale and a 1031 exchange.

III. Noresidents and Nondomiciliaries
Nonresidents who are not engaging in a trade or service in the U.S. and have actually not lived in the U.S. for periods aggregating 183 days during a given year can normally get away capital gain taxation totally. For example, U.S. capital acquires taxes are generally inapplicable to gains stemmed from the sale or exchange of personal effects offered the individual has not engaged in a business or trade in the U.S. and has not resided in the U.S. for an aggregated 183 days. Gains associated with portfolio interest paid to foreign investors and interest on deposits normally prevent capital gain taxes presuming an absence of trade or company in the U.S.

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