What is capital gains tax?

What is capital gains tax

Capital gains tax is a tax on profits (value) which is made from the sale of assets such as real estate or securities. A related tax is the capital gain tax levied on the increase in the value of assets, regardless of whether they were sold or not.

Advantages and disadvantages of these taxes

An advantage of the capital gains tax is that it taxes a larger part of the income from capital than an income tax that only taxes the direct proceeds, such as the dividend of shares. Because no distinction is made between the way value movements are taxed and the way other income such as interest and dividends are taxed, there is neutrality in the tax treatment of these different types of income.

This is a big advantage from an economic perspective. If there is a different treatment of different types of income, this will lead to disruption of market forces because some investments will then become more attractive than others.

Disadvantages that are often mentioned are the complicated calculation of the profit achieved and the possibility that gambling profits are taxed as a result of inflation. The existence of a capital gains tax may result in individuals changing their securities portfolio less often (lock-in effect). Taxation of the profit on the home would then lead to reduced mobility. The capital gain tax has the main disadvantage that it can endanger the liquidity of taxpayers. The lock-in effect does not seem to exist.

Practical application

The capital gains tax is mainly known from the United States. The rate is half of the rate for the income tax. This tax is also levied in other Anglo-Saxon countries.

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