I would like to start by saying that capital gains is one of the main forms of income. In fact, capital gains is the same thing as profit. If all kinds of monetary gains are included in the category of taxable income, those who strive for uniform taxation of all types of income should be included in this category, and capital gains.
Capital gains is the gain on sale of capital assets. Capital assets can be both real estate and financial assets (stocks, bonds, etc.)
Capital gains tax is charged on the margin of net capital gains (after deduction of expenses and losses). The level of tax depends on the time period during which the assets are in property and the general level of taxable income. For individuals the tax is calculated differently than for businesses and depends, inter alia, on the appointment of an asset – commercial or private.
Taxpayers have a tax deductibility: some initial amount of capital gains are not taxed. For the companies the tax rebate on the initial amount does not exist. Instead of depending of the level of tax on the length of the period of ownership of the asset, certain discounts may be granted in accordance with the retail prices index (RPI).
The capital gains tax is the income tax on individuals and entities, derived from property transactions as a sale, gift, exchange of property, providing it to other persons. Capital gains tax is charged in the implementation of certain capital assets, which makes a profit (private cars, housing, national savings certificates and bonds, etc.). The purpose of this tax is to limit the size and profitability of speculative trading.
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The revenues are defined as the difference between the market price of the property and the price of its acquisition. The tax is paid on the top of the existing rates of income tax if the payer is an individual, and the basic rate of the profit tax of corporations if the payer is the company. Since 1982, the income in the form of capital gains is computed after deducting the discounts on inflation.
Tax on (realized) capital gains is a tax on the income from your assets. Virtually all capital assets are subject to either income tax or capital gains taxes. However, there are opportunities to plan out the money for tax collection so as to take advantage of all discounts offered by these two taxes. Winnings in gambling and damages for defamation are not taxed. Cars are also not taxed on capital gains, as most of them are sold at a loss.
If you invest the funds in the classical models of cars and be able to convince the tax office that they are not going to be traded, you will be able to save money on their sales tax free.
In the United States of America until the second half of the 80s, only forty per cent of capital gains was taxed. Investors in the fifty per cent rate of income tax had to pay in taxes to fifty per cent of their dividends, and only twenty per cent of capital gains. Until the income is not realized, the shares are not sold, the investor was not obliged to pay the tax.
And since the dollar paid in the future is worth less than a dollar paid today, the tax deferral provided a definite advantage of the capitalization of profits. Under current tax law of the United States of America, both types of income are taxed but the tax rate on capital gains is still lower than the dividend yield. Investors prefer shares, which total return for the holding period, calculated taking into account taxes, is above.
If the capital gains are short-term or long-term, depends on the duration of ownership, for example, it is a long term, if it is owned for more than one year. Property acquired after someone’s death is always considered as a long-term, regardless of how long it was owned by the deceased or the beneficiary.
In the United Kingdom the capital gains tax has its special features. If the sale or transfer of property to its value is increased, you can get under the income tax. This tax does not apply when you sell the personal property worth 6,000 pounds or less, or your main home.
Maybe you will have to pay the income tax, for example, if you: sell, change, or otherwise transfer the rights for property or its part; receive money for the property, for example, compensation for the damaged property.
The basic rate of tax on capital gains in 2007-2009 was: ten per cent if the income is below the starting rate for income tax (£ 2,230); twenty per cent if the income is between primary and basic rate for income tax (£ 2,231 to £ 34,600); forty per cent if the income is greater than the high rates for income tax (£ 34,601 and above) .
Capital gains tax in the United Kingdom does not apply if the company owns the corporate rights of its subsidiaries in excess of ten per cent; and if these enterprises are engaged in trading activities.
It should be stressed that the capital gains tax is actually withholding tax only on condition that it is charged from the arising, rather than the realized gain of the capital. In other words, if the assets of the taxpayer for a period rose from 300 to 400 ounces of gold, his income is 100 ounces, even if he did not sell assets for the sake of “fixing” of profit. His income consists not only of the money that can be used for paying expenses.
The same situation as with the undistributed profits of corporations which should be included in gross income of each shareholder. Taxation of only realized gains and losses introduces serious distortions in the course of business, because investors get a strong incentive never to sell shares, but to store them for the future generations. Selling shares, the owner has to pay tax to increase their rates over a very long period.
As a result of it, the productive capital would “freeze” the property of one person or several generations of families that would deprive the economy of flexibility and prevent the market in a timely manner to take into account continuous changes. And over time, the damage from the lack of flexibility will be increasingly exacerbated.
The activity of capital market is also seriously distorted by the fact that the tax on income from the sale of capital gains can be very significant and is not uniform. After all, the capital gains are accumulated over a very long time, and do not arise at the time of sale, whereas the income tax base is the realized income of every year. It is paid only on the income of the year, when the capital was implemented.
In other words, people, fixing their profits in a given year, must pay considerably more taxes than it would be “justified” by the tax on the income actually received during the year. Assume that the man bought the shares for $50, their market value rises to $10 a year, and he sold them four years later for $90. For three years he did not pay taxes for raising their value at $10, and in the fourth year he has to pay tax on the price increase of $40 .
Therefore, this is a tax on the accumulated capital rather than income. And it creates an even greater incentive not to part with assets, ie it creates an additional restriction on the market flexibility.
Of course, any attempt to levy a tax on capital gains encounters considerable difficulties, but any attempt to establish a uniform income tax meets the insurmountable difficulties. The market value of equity is a very serious problem. Any estimates are always approximate, and there is no way to verify the exactness of capital gains.
Another source of insurmountable difficulties is to change the purchasing power of currency. If the purchasing power fell by half, and the cost of capital has increased from 50 to 100, then we have no capital gains: just as a result of doubling of the face value the real cost of the capital remains unchanged. But if doubling the general price level, the nominal cost of the capital remains unchanged, it means that its real value has been halved.
That is, at the assessment of increase or decrease of the cost of capital, the changes in the purchasing power of money should be taken into account. Thus, at the decreasing purchasing power the estimation of the revenue is overrated, that leads to the eating through the capital.
But if you pose the problem to correct the evaluation of changes in the cost of capital in accordance with changes in the purchasing power of money, what methods should be used for it? After all, we can not directly measure the change in purchasing power. Any “code” gives a completely arbitrary estimate. And since we can not accurately measure the amount of income, with any method we will not be able to achieve the uniformity in the taxation system.
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Professor Groves advances several reasons in favor of not to use this figure as a base for taxation. Almost all of his objections are related to the taxation of income from realized, and not arising capital. The only significant is already familiar argument: “The increase and decrease of capital, unlike most other types of income do not have a regular character.” (Groves H. M.,1939).
But no other income does not also has “regular basis”. Gains and losses are also quite volatile, because they are based on the speculative business and adaptation to the changing circumstances. But nobody on this basis claim that profit is not an income. All the other incomes also have a changeable character. In a free market, no one has a guaranteed income. All revenue sources are tied to market changes.
Illusory distinction between the income and capital gains is demonstrated by the problem of the writer. Is the income of the writer in a certain year, which was the result of the publication of the book, at which he had been working for five years, the “income” or the result of an increase “capital value” of the author? It should be obvious that all these distinctions are quite meaningless.
It goes without saying that capital gains are profits. And the real value of the total capital gains in a society is equal to the aggregate profits. Earnings increase the cost of the capital and reduce its losses. Moreover, there are no other sources of capital gains. What is a personal saving? All personal savings, with the exception of larger cash balances, are invested somewhere.
These investments constitute the capital gains of shareholders. Aggregate savings form the comprehensive capital gains tax. But it is equally true that the existence of comprehensive income in the economy requires a total net savings.
Thus, in the framework of the national economy there is a correspondence between the aggregate net profits, total capital gains and overall net savings. The net reduction of the aggregate savings has losses and capital losses across the economy as the result.
To summarize it should be said that if we strive for uniformity of income tax, the capital gains should be considered as the equivalent of income (adjusted for purchasing power of the monetary unit), and the decrease of the capital – as a negative income. Some critics argue that it was illogical to adjust the amount of capital to reflect changes in prices and not to do so in respect of income, but they are missing one thing.
If we intend to levy a tax on income rather than capital accumulation, it is necessary to amend the change of the purchasing power of money. In periods of inflation, for example, the subject of taxation is not a net income, but the capital itself.
Many countries advocate for the abolition of capital gains tax. I believe that the abolition of this tax will legalize the market.
The campaigns on the assessment of real property for tax purposes revealed that the contracts of sale of almost eighty per cent of the cases indicated the underestimated amount of the transaction. This is connected to, primarily, the desire of citizens to reduce taxes. Because the state tax, fees for notary services are estimated of the amount specified in the contract.
Capital gains tax is calculated on the difference between the price specified in the contract of sale and inventory and the value of the property. But the inventory assessment for property taxation was carried out some years ago, in the intervening period the real estate prices rose to a great extent under the influence of inflation, that is it is not correct to talk about the increase of the capital as such.
It is abnormal, when a real estate transaction tax, in essence, is charged twice: first as state tax and the second – as the capital gains tax. It is necessary to leave one tax – the state fee and for a certain period, say ten years, all payments related to transactions with real estate rely on the value recorded in the inventory. Then there is no sense to specify in the contract prices do that not exist, and authorities will receive the authentic information about the prices of real estate on which they will make re-evaluation of the value of the objects.
The proposal to abandon capital gains tax will legalize the real estate market, facilitate the work of appraisers. However, this measure will bring a positive impact if it will be mounted on a sufficiently long period, not less than five years. Since the mentality of the citizens needs to be changed. This will bring the market out of the shadows, making it more civilized. I think the capital gains tax, primarily, should be canceled on the sale of principal residence or housing, which the owner has been possessing for a certain time.
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