When you buy a stock, a bond, or a longer-term asset, like a house or fine jewelry, its value can grow over time. If one of those “capital assets” grows in value and you decide to sell it, your “capital gains” would be roughly the difference between your original purchase price and the amount of money you sell the asset for.
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This legally reduced his taxable income under existing laws. Similarly, the Rockefellers leveraged charitable foundations to minimize taxes, allowing them to preserve wealth while directing funds to their preferred causes.
Capital assets can be classified as property owned and used for personal or investment reasons. If a capital asset grows in value and the holder decides to sell it, their “capital gains” would be roughly the difference between the original purchase price and the amount of money they sold the asset for.
If you bought a share for $5 and sold it for $140, your capital gain would be $135...on paper, at least. In reality, the math is fuzzier. Capital gains are actually the difference between the sale price of the asset and your cost basis.
Short-term gains (assets held for one year or less) are taxed like regular income, at rates up to 37%. Meanwhile, long-term gains (assets held over a year) are capped at 20%, offering significant savings for high earners.
In 2024, a single filer making anywhere between $200,001 and $243,725 per year would pay a 15% tax on long-term capital gains. But when it comes to short-term capital gains, they’d be taxed at the same rate as their regular income, which, in their case, is 32%.
To understand what you would owe on short-term capital gains and to visualize the favorability of long-term tax rates, you need to know how your traditional income is taxed at the federal level. A breakdown explores the different brackets for 2024, separated by filing status.
However, up until 1921, they were treated the same as ordinary income. Ever since then, rates have swung up and down.
Ratified in 1913, the 16th Amendment paved the way for a far-reaching federal income tax and supercharged the country’s coffers. Before then, the US depended on import tariffs and so-called consumption taxes to raise revenue.
Sweden’s beloved musical group ABBA wore outrageous costumes designed to take advantage of a tax break for work uniforms. The law stated that people could deduct expenses for work clothing, as long as it couldn’t be worn for other purposes.
While wages and salaries are taxed progressively at rates up to 37%, long-term investments are taxed at lower rates: 0%, 15%, or 20%. For wealthy individuals like Buffett, whose income mainly comes from investments, this means paying a lower effective tax rate than someone earning a salary.
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