Capital gains tax in the United States is a rated tax, decided based on the total income level of the tax – payer along with other characteristics of the profits such as the source of the amount received and the kind of income.
In order to understand if these are funds that will be taxed as regular income in the United States, or according to lower tax brackets, that are used to tax capital gains, read this following guide.
What are capital gains and to which properties do they apply?
Capital gains are, in fact, the growth in capital that is generated when a property is sold, as in – the gap between the cost of the purchase of the property originally to the amount received when it is sold. Sufficed to say that the term “property” does not apply only to real – estate property, but also financial property.
The gap between the amount of purchase of a financial property to the amount of selling, is also considered taxable capital gain that must be taxed as such. This happens when dealing with selling of stocks, buying trust funds, selling bonds, and more of the same.
Why is it important to take into account the matter of capital gain in the United States?
Every investor is well aware of the fact the real – estate investments in the United States or the execution of business activities within its borders, required calculation of tax considerations in the deal.
For example, capital gains tax (like taxation of dividends) is an element of taxation that greatly affects the profitability of different deals. That is why it cannot be ignored when you are considering making a certain purchase within the borders of the United States or expands business activities to the American market.
The taxation of capital gains in the United States on the sale of properties in the short term versus sale of properties in the long term
As mentioned, the sale of properties in the United States, including financial properties such as: stocks, trust funds, and bonds, are subject to capital gains tax payments.
In this regard, it is important to know that the IRS differentiates between properties that were owned by the tax – payer for a period of 12 months or more, to those who were owned for a shorter period of time. According to this distinction the capital gains tax rate on a particular income or profit is decided.
A financial property that is sold in less than 12 months of its purchase is called “short – term capital gain”. The profit from the sale will be added to the rest of the tax – payers’ income, and the tax that will be collected will be according to the marginal tax rate that applies to the seller.
A financial property that is sold after more than 12 months since its purchase, is called “long – term capital gain”. The tax collected on income from selling this kind of property, will be according to capital gains tax brackets that are set in the law according to the type of property and the state of it.
Setting the tax rate that apply to capital gains made in the United States, changes between properties that were held for less than a year and properties that were owned for a longer period of time, since the government is interested in encouraging investors to hold on to their properties for longer periods of time and not sell a property soon after it was purchased.
That is why the capital gains tax rate collected on the sale of properties held for over a year, are lower and more comfortable than in the case of short – term ownership.
Capital gains tax for private citizens or partners in LLC companies in the United States in the sale of a property that was owned for a year or more since its purchase
Capital gains from the sale of a property after an ownership period of 12 months or more since the date of the purchase, will be taxed according to capital gains tax brackets (that are, as mentioned, lower than the marginal tax rate that applies to the tax – payer when selling a property that was owned less than 12 months).
Capital gain tax brackets for private citizens or partners in LLC companies in the sale of a property after a year or more
When dealing with private citizens or partners in an LLC company in the United States, the capital gains tax brackets will be as follows:
- Capital gain tax at the rate of 28 percent
This taxation will apply to capital gains generated from the sale of collections or QSBS type stocks.
- Capital gain tax at the rate of 25 percent
This taxation will apply to the deprecation portion of the capital gains.
- Capital gain tax at the rate of 0 to 20 percent
This taxation will apply to the capital gains that do not fit with other definitions that were mentioned, in accordance to the income bracket of the tax – payer.
Needless to say, these tax brackets do not apply to companies in the United States (foreign or local) even in regards to the sale of property that was owned for more than 12 months.
Capital gains tax for foreign and local companies in the United States versus private citizens and partners in an LLC company
When it comes to the capital gain of a private tax – payer or someone who is part of a partnership in an American LLC company, the capital gains tax on the sale of property in the United States will be collected according to the percentage of marginal tax that the tax – payer owes on the basis of their overall income.
The marginal tax is between 10 percent and up to 37 percent. If it is a company (local or foreign), the collected tax rate will be according to the company tax that stands at 21 percent.
| Tax requirements for private citizens or partners in LLC companies in the United States | Tax requirement for local and foreign companies | |
| Short – term ownership property sale | Tax rate according to the marginal tax brackets – 10 percent to 37 percent. | Company tax at the rate of 21 percent. |
| Long – term ownership property sale | Lowered tax rate moving between 0 to 28 percent. |
Is it possible to delay settling payment on capital gains tax to the IRS?
In some cases, there is the possibility to delay the recognition in capital gains that were generated in the United States by using certain tax laws in the United States to help your tax planning.
For example, settling up on capital gain tax on an American real – estate investment can be done, by using a maneuver called American real – estate exchange. There are, of course, other ways that allow this legally, and they can be learning by turning to professional tax planning.
What is between capital gain tax and capital losses?
It is important to know that capital losses are deductible from capital gains non – dependent on the length of the ownership period before selling the property, as long as the loss balance after the gain deduction, maintains its attributes going forward.
For example: if you made 10,000 dollars in the process of selling a property you have owned for over a year (long – term ownership) and lost 5,000 dollars on the sale of a property you have owned for less than a year (short – term ownership), after the deduction, you will still be required to pay taxes according to the set rates decided by law to tax capital gains, as the loss balance maintains it’s properties as capital gain from a long – term property.
When the is no capital gain, there is an option to deduct a small amount of the accumulating capital losses against the entirety of the tax – owing income every year, the following fiscal year. This is all while any loss exceeding that amount, will accumulate to the next fiscal years and deducted in the same order.
Who owes tax payments on capital gains tax in the United States for profits from stocks?
According to the tax laws in the United States, and the tax treaties it has with other countries, the United States is barred from taxing foreign investors who are producing capital gain from stocks, while only the investors’ country of origin has the option of collecting taxes on those gains.
When it comes to American citizens living outside of the United States and are required to submit tax returns to the IRS, usually they are required to pay taxes for gains generated from stocks, just like any American citizens residing in the United States.
The bottom line
Interested to know more about capital gain tax in the United States? The MasAmerica website team would always be happy to help you and be at your service in completing tax planning in a profitable and professional way.
