When you sell an investment asset to make profits, you’ll pay capital gains tax on the profits. This can be a case of bonds, stocks, precious metals, cryptocurrencies, and other similar investments and commercial real property.
The tax you be required to pay for the proceeds of a sale will depend on the time you’ve owned the asset assets that are held for more than one calendar year (long-term gain) can be taxed with a lower rate than assets that are fit for less than 12 months (short-term gains). The status of your income tax filing and your gross annual income are factors in the capital gains tax rate.
In this article, we’ll talk about the historical background of capital gains taxes and the taxes you could anticipate paying in capital gains in the present.
A 90-Year History Of Capital Gains Taxes
Taxes on capital gains were first introduced in 1913. From 1913 to 1921, the entire capital gain was subject to the same tax rate as other income sources, up to 7 percent. This significant change occurred as, in 1921, the U.S. sought increased income to support its participation during World War I.
The 16th Amendment to the Constitution, ratified in 1913, granted Congress the authority to impose taxes on income. In October of that year, the first income tax was imposed at 1 percent, and later it was increased to 7 percent in the case of those earning more than $500,000 a year. In 1916, the income tax was increased to 2 percent. Americans who made more than that $1.5 million would be taxed 15 percent. In 1916, the War Revenue Act of 1916 resulted in a dramatic tax increase on income at 16,0 percent for Americans who earn $40,000 a year and a whopping 70% for those who make an annual income of more than $1.5 million.
These numbers might seem too high, but only five percent U.S. population paid any taxes at all, which was $40,000, an incredible amount of money in the era. When adjusted for inflation, the value of $40,000 in 1916 was less than one billion in dollars for 2020.
Returning to capital gains tax, The Revenue Act of 1913, followed by similar legislation during 1916 and 1918, and finally, 1921’s Revenue Act of 1921, was aimed at further defining and standardizing how taxes were imposed on profits. The 1921 Act split capital gains into two types that were held for longer than two years and those that were held for under two years. The tax rate for short-term gains is as regular income tax rates. However, long-term gains were taxed at a flat percentage that was 12.5 percent. These changes were made due to the concern that the mix of income and capital gains taxes had been stifling transactions. When they were combined, the two taxes soared to a high that was 77 percent during World War I.
Additional changes to capital gains taxation were introduced through an amendment to the Revenue Act of 1926 and the following year in 1928. The Revenue Act of 1934, the follow-up to the Great Depression, saw comprehensive revisions to the capital gains tax structure. In the 1930s, many wealthy people paid no tax on the income because deductions for losses on bonds and stocks outweighed their regular income. Capital losses were restricted to the number of capital gains, but with the restriction that $2,000 was able to be credited as regular income.
Additional changes were made with the tax acts passed in 1938, 39, 40, ’41, and ’43, which included clarifications on capital property used for trade or business and regulations that dealt with taxes on capital gains and holding times and capital losses in 1942.
Tax rates on capital gains were increased with the new Tax Reform Acts of 1969 and 1976. In 1981 the tax rate on capital gains was set by 20 percent. However, 1986 the Tax Reform Act 1986 increased the amount to almost 28 percent. In 1997, the Taxpayer Relief Act of 1997 also cut the cap on the rate of capital gains taxes by 20 percent. The gains from Roth IRAs were exempt from taxes on capital gains under 1997, as were capital gains that resulted from selling residences owned by individuals that exceeded $5000 for married couples and $250,000 for single taxpayers.
The additional tax rate for capital gains reductions was enacted by legislation such as the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Taxes On Capital Gains Today
The most significant change in capital gains taxes in the last decade occurred with the Tax Cuts and Jobs Act of 2017. The deferral of capital gains tax for investors who make 1031 exchanges remained for real estate assets; however, it was removed for other items, like artwork or collectibles. Also, the gains of Opportunity Fund investments held for at least a decade when the asset is between five and ten years are eligible for the partial exclusion.
The table below shows both short-term and long-term rates of capital gains taxes in 2020:
Short-Term Capital Gains
|Rate||Filing single||Head of Household||Married Filing Jointly||Married filing separately|
|37%||$518,401 and up||$518,401 and up||$622,051 and up||$311,026 and up|
Long-Term Capital Gains
|Rate||Single Filer||Married but Filing Jointly||Married and Filing Separately||Head of Household|
|0%||Under $40,000||Under $80,000||Under $40,000||Under $53,000|
|20%||$441,451 and up||$496,601 and up||$248,301 and up||$469,051 and up|
Complete A 1031 Exchange To Delay Capital Gains Taxes
Investors who sell their real property do not need to invest the proceeds in another investment; however, any gains derived from these capital assets depend on the taxation rates outlined above.
Taxes can be deferred in addition to the depreciation you have claimed on the asset by reinvesting the funds in a similar asset and then completing the 10-31 exchange. The process of exchange is subject to specific hard dates. However, it is crucial to have alternative properties and an exchange company set before closing on your investment asset.