A capital gain refers to the increase in the value of a capital asset that is realized when it is sold. In other words, a capital gain occurs when you sell an asset for more than what you paid to purchase it… Almost any type of asset you own is a capital asset. They can include investments such as stock, bonds, or real estate, and items purchased for personal use, such as furniture or a boat. - Investopedia
I belong to a debate club and this week we’re debating whether capital gains should be taxed at the same rate as ordinary income. Currently, short-term capital gains (assets held for one year or less) are taxed at the ordinary income tax rate. The highest ordinary income tax rate in the US is 37%. Most long-term capital gains (assets held for over a year) are taxed at 0%, 15%, or 20%, depending on one’s taxable income. The highest rate is 20% for individuals with high taxable income, with some exceptions, e.g. a higher rate for gains from selling collectibles held for over a year. Some high-income individuals are also subject to an additional 3.8% tax on their investment income, including capital gains. This means the highest possible federal capital gains tax rate could be 23.8% (20% + 3.8%). Plus all but eight states have their own capital gains tax. For example, California’s top rate is 14.4%. Thus, Californians’ top capital gains tax for is 38.2% (23.8% + 14.4%) - considerably higher than the rates in most western European countries. Take a look:
Several developed countries have lowered capital gains taxes over the last couple decades, mainly to stimulate economic growth, investment, and global competitiveness, as well as to discourage investors from holding on to their assets simply to avoid taxes. However, some argue that lower capital gains taxes mainly benefit the rich and have little impact on economic growth or investment. The verdict is out on that score.
I have no idea if the tax on capital gains should be increased. Too many variables! But I’m pretty sure countries should avoid relying on capital gains tax revenues to pay ongoing bills, because revenues from these taxes are volatile and hard to predict from year to year - just like the movements of the stock market. This is why California’s former governor, Jerry Brown, criticized the state’s high capital gains tax. Brown argued for structural tax reform to achieve greater fiscal stability but acknowledged the state’s politics wouldn’t allow this to happen. So he kicked the bucket down the road.