The Advantages & Disadvantages of Capital Gains Tax

by Fraser Sherman

Capital assets can be houses, cars, stocks, jewelry, collectible comic books and Impressionist art. When you sell capital assets, you pay capital gains tax on the sale, rather than treating your profits as ordinary income. The different tax treatment affects not only your bottom line but the economy as a whole.

The Rates

If, say, you buy some antique jewelry at a garage sale, then turn around and sell it for 10 times the purchase price a month later, your capital gains rate is the same as your regular income tax rate. If you hold your assets for at least a year before selling, the rates are much better. As of 2013, if you're in the 10 percent or 15 percent income tax bracket, your long-term capital gains rate is zero -- you pay nothing. Even if you fall in the top 39.6 percent tax bracket, you pay a maximum of 20 percent on long-term gains -- and that's only if you earn more than $400,000.

Unfairness

The low rates are great for people who have gains to report, but an "Inc." column argues they're unfair to people whose income is based on earnings. If, say, you pour money into your new business and earn $200,000, that's taxable at a 28 percent rate, as of 2013. An investor who invests the same amount in corporate stock and earns $200,000 only pays 15 percent if it's long-term gains. That leaves entrepreneurs who fund their own companies at a competitive disadvantage.

Capital Losses

If your boss slaps you with a pay cut or a lower commission rate, the IRS doesn't give you any compensation for the lost earnings. When you sell stocks or investment real estate at a loss, on the other hand, you get a write-off. First, you deduct the loss against any capital gains you have from other sales. Then you write off up to $3,000 against your other income. If you lose more than that, you carry it forward and deduct it next year -- a tax cut that keeps on giving.

Manipulation

The more complex the rules get -- and capital gains taxes can get quite complex -- the easier they are to manipulate. Private-equity managers, for instance, pay capital gains tax rates on their income rather than regular income tax. A great deal of tax strategizing and planning by people in the upper tax brackets involves turning their income into capital gains. People with lower income end up paying higher rates, because they don't have the attorneys and accountants to find tax loopholes.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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