Taxes are additional fees issued by the government to be added to purchases and businesses. This fee is used to fund the government. But are you aware of how it works?
Purchases have taxes as well as your overall income. If an entity bought and sold assets, the gains and/or losses would also be taxed. There are different protocols for different types of taxes. If you are handling stocks, it is advisable to understand gains and losses.
What Are Capital Gains And Losses?
Stock gains or capital gains pertain to the sales revenue from selling an asset like stocks. A gain is achieved whenever an asset is sold higher than its investment price. The amount of money invested in something you have bought is called the cost basis.
For example, you bought stocks for three thousand dollars and then sold them for three thousand and five hundred dollars; you have gained five hundred dollars from that sale.
A stock or capital loss is the opposite. It happens when the selling price is lower than the cost basis. You paid more money when you bought an asset and could not sell it at a higher price. So using the first example, if you bought something at three thousand dollars then sold it for two thousand and five hundred dollars, you had lost five hundred dollars.
Capital gains and losses for an individual or business are noted in their accounting and tax filing. A gain or loss can only happen when the asset is sold. Both situations affect how you handle taxes.
How Do Gains And Losses Affect Taxes?
The way capital gains are taxed depends on whether they are short-term or long-term. If you hold on to an asset for a year or less than a year, then it is categorized as a short-term gain, while an asset you have held on for more than a year is called long-term gain.
Generally, you pay smaller taxes for long-term gains compared to short ones. Short-term gains are taxed based on the tax rate for your ordinary income, but you can reduce your taxes whenever you hold on to an asset longer.
Naturally, the higher the gains, the higher your taxes are. There are ways to reduce taxes on capital gains:
- Making long-term gains.
- Selling assets when your income is low.
- Using capital losses
Capital losses are able to reduce your taxes. Since taxes are based on the overall income of an individual or business, the gains and losses are accounted for. Imagine having a capital gain of three hundred dollars, then a hundred dollar loss; you’d end up gaining only two hundred dollars. Lower gains mean lower taxes.
Losses can heavily affect the net capital, which is the overall and final status of your account. If your capital losses are higher than gains, you will end up having a net capital loss. You can use this to reduce other taxes.
Taxes are needed to support government activities. However, individuals would rather not pay high taxes. Fortunately, there are ways and options to reduce your taxes legally. Understanding how to settle your accounts and filing taxes will help with that.
You are required to report it correctly to the government. Any prohibited alterations caught would lead to sanctions.