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What is the difference in tax rates between ordinary income and capital gains?

What is the difference in tax rates between ordinary income and capital gains? Capital gains is income you receive when you buy stock at level X and you sell it for level Y. Z is Y [sales price] minus X [purchase price].

Investors also earn ordinary income. This is the dividend and interest you receive from that stock.

Capital gains are based on an asset. A home, and bonds, and stocks are capital assets if you are holding them for an investment. When you sell an asset, there are numerous tax laws that deal with capital gains tax.

Many people think capital gains are better than ordinary income. Short-term capital gains are taxed the same as ordinary income. Long-term capital gains have a different tax rate.

A capital gain becomes effective if an investor owns an asset 366 days, or a year and a day. The basic capital gains tax rate is 15%.

You measure a capital gain by using the sale price [less commission] then subtracting then subtract the cost [minus commission]. The result or last number is capital gain.

It could be if your cost to buy the asset is more than the income as a result of the sale.It could be if the purchase price is higher than the sales price. This loss is called capital loss. Capital loss used to be $3000 a year. If you have a higher loss, over 3000, this can be used the next year.

If you have a capital gain that would be taxed, and a capital loss from sale of a 2nd asset, the capital loss can be subtracted from the capital gain.

There are government laws that are designed to prevent investors from creating capital losses to avoid paying taxes. One is called the Wash Sale Rule. This law states an investor cannot sell an asset at a loss if he or she purchases the asset from 30 days before the sale to 30 days after the sale- the customer buys back the same asset.

The most common capital gains that are taxed are stocks, bonds, precious metals and real estate. Property is considered a real asset. Stocks, bonds are financial assets.

In accounting, a capital asset is an asset that is recorded on a balance sheet as capital. This is property that creates more property. Capital or capital goods or real capital refers to an already produced durable good. Shovels could be seen as a factor of production, and a warehouse can also be seen in that light.

An investor could purchase assets by money, or financial capital. Capital can also be seen as wealth especially used to start or maintain a business.
According to US Code Title 26 Section 1221; capital assets are defined as property held by the taxpayer. But does not include exceptions such as inventory intangible property and depreciated property held by a business.

Capital gains are better than ordinary income because you do not pay taxes on the asset until you sell it.You can sell in December of one year or in January or the next year which allows you to choose to use the gain or loss in the first or second year. This is with stocks income like dividends or interest.

An example of capital gain would be to buy 100 shares of Wet Waterworks for $35.
Then you pay a $40 commission, so your total cost is $3540.

When the stock goes up to $39 per share, you sell the 100. There is a $40 fee. Total receipt is $3860 or $3900 minus the $40.Your capital gain is 3860 minus 3540 or $320.
So ordinary income from the dividends or interest is not as advantageous to an investor. There is no capital loss on the dividend or interest payment.

This is what the difference in tax rates between ordinary income and capital gains. The process appears somewhat tricky, however when you apply the process it really does make more sense.

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