The basic theory behind a trade is that it is considered successful when a product is sold at a higher price than the base cost, i.e., the amount of money spent while buying a product or investing on an asset. Capital Gain and Loss are the important facts you must understand well before investing or selling an asset. This article will help you calculate these profits, losses and the benefits obtained while filing for tax refund.
Understanding Capital Gain and Loss:
Capital Gain is the profit you earn from selling an asset. Real estate, bonds, mutual funds, gold, diamonds, stock market investments are all considered assets or capital investments. Until you sell a particular asset, you enjoy the benefits without paying any tax. If you sell an asset at a higher price than the amount you invested while buying, you receive a profit out of the sale. This profit is known as Capital Gain. If the asset is sold at a lower price, you face depreciation, which is known as Capital Loss.
Calculating Capital Gain and Loss:
For calculating capital gain and loss you need to know the following information:
Cost Basis – The original cost paid while buying an asset
Sale Price – The current value of the asset – amount you received from the buyer
Cost Basis – Sale Price = XYZ(amount)
If XYZ is higher than cost basis, then that amount is your Capital Gain
If XYZ is lower than cost basis, then that amount is known as Capital Loss
Capital Gain Tax Essentials:
Once you have calculated Capital Gain and Loss, you need to update the amount in the tax form while filing for your tax refund. If the asset is held for more than a year or two, it comes under ‘long term’ gain or loss and a lower rate is applied while taxing. The period you have held the asset determines the tax benefit rate to which you are entitled. The longer the period for which you held the asset, the lower the tax rate.
In-depth knowledge related to financial information such as investments, wages and taxes withheld makes things easier while filing tax for refund. Even if you plan to work with a finance specialist or tax consultant, it is highly advisable that you understand Capital Gain and Loss, in order to reap applicable benefits.