Taxable Gain

Taxable Gain

A taxable gain is a profit that results from the sale of any asset that is subject to taxation. Long-term capital gains taxes were temporarily eliminated for low- and moderate-income investors after the Great Recession of 2008, and the American Taxpayer Relief Act of 2012 made this change permanent with a tiered long-term capital gains structure that imposed no investment tax on taxpayers below the 25-percent income tax bracket. A sale of assets held longer than one year will generally be subject to long-term capital gains taxes and that tax rate will be lower than the short-term tax rate. The IRS collects the ordinary income tax rate for short-term capital gains. This discrepancy between the short-term and long-term rates has led to a debate about the fairness of U.S. tax policies. Some people believe that a low long-term capital gains rate favors wealthy individuals, especially those who can structure their compensation as capital gains and dividends rather than regular salary.

A taxable gain is a profit earned on the sale of an asset.

What Is a Taxable Gain?

A taxable gain is a profit that results from the sale of any asset that is subject to taxation. For example, if you sell a piece of real estate for more than the original price, you have made a taxable gain. The same goes for the sale of stocks, precious metals, bonds, and even jewelry.

A taxable gain is a profit earned on the sale of an asset.
To calculate the taxable gain on the sale of an asset, an individual takes the difference between the original purchase price and the sale price of the investment.
When you sell a capital asset like a piece of real estate, stocks, or bonds for more than the original purchase price, you have a capital (and taxable) gain.
Short-term capital gains are taxed as ordinary income by the IRS.

Understanding Taxable Gain

Taxable gains are the profits that an investor receives from selling an asset at a price higher than the cost basis of that asset. The U.S. Internal Revenue Service (IRS) considers an asset to be any property or investment not generally used in the conduct of an individual’s trade or business. A sale of an asset at a price higher than the individual’s basis will generally be subject to capital gains taxes.

The taxable gain calculation works like this: an investor will take the difference between the sale price of the investment and the original purchase price, or cost basis. They can figure it out by using the cost basis refers to the original cost of the asset, adjusted for tax purposes to account for reinvested dividends or capital gains distributions.

Short-Term vs Long-Term Taxable Gains

For tax purposes, the IRS differentiates between short-term and long-term gains. A sale of assets held longer than one year will generally be subject to long-term capital gains taxes and that tax rate will be lower than the short-term tax rate. The IRS collects the ordinary income tax rate for short-term capital gains. This discrepancy between the short-term and long-term rates has led to a debate about the fairness of U.S. tax policies.

Some people believe that a low long-term capital gains rate favors wealthy individuals, especially those who can structure their compensation as capital gains and dividends rather than regular salary. Others have argued that capital gains taxes are inherently unfair because they are a form of double taxation. Perhaps to counteract this inequity, capital gains taxes have been structured to take a lighter toll on lower-income investors.

A second argument against high capital gains rates holds that lower rates encourage overall investment while they foster economic growth and tax revenues.

Long-term capital gains taxes were temporarily eliminated for low- and moderate-income investors after the Great Recession of 2008, and the American Taxpayer Relief Act of 2012 made this change permanent with a tiered long-term capital gains structure that imposed no investment tax on taxpayers below the 25-percent income tax bracket.

Special Considerations

Taxpayers can offset the tax burden of investment gains by claiming investment losses on their annual returns. The IRS allows individuals to deduct capital losses up to $3,000 over the amount of their capital gains. In some cases, investors can use capital losses beyond that limit in future years.

Related terms:

American Taxpayer Relief Act Of 2012

The American Taxpayer Relief Act of 2012 was passed in response to the approaching combination of spending cuts and tax hikes known as the fiscal cliff. read more

Capital Gains Tax

A capital gains tax is a levy on the profit that an investor gains from the sale of an investment such as stock shares. Here's how to calculate it. read more

Capital Gain

Capital gain refers to an increase in a capital asset's value and is considered to be realized when the asset is sold. read more

Capital Loss

A capital loss is the loss incurred when a capital asset that has decreased in value is sold for a lower price than the original purchase price. read more

Cost Basis

Cost basis is the original value of an asset for tax purposes, adjusted for stock splits, dividends and return of capital distributions.  read more

Gain

A gain is an increase in the value of an asset or property.  read more

The Great Recession

The Great Recession was a sharp decline in economic activity during the late 2000s and was the largest economic downturn since the Great Depression. read more

Income

Income is money received in return for working, providing a product or service, or investing capital. A pension or a gift is also income. read more

Long-Term Capital Gain or Loss

A long-term capital gain or loss comes from a qualifying investment that was owned for longer than 12 months before being sold.  read more

Realized Gain

A realized gain is a profit resulting from selling an asset at a price higher than the original purchase price.  read more