Taxation on Capital Gains in the U.S and Around the World

Any profit made through the sale of a capital asset (such as a house, stock, or bond) is subject to capital gains tax. You will have a capital gain if the sale price of your asset is higher than your purchase price, and a capital loss if the sale price is lower.

Forgetting to consider the capital gains tax in particular may be a costly mistake when making investing decisions. After all, it might be difficult enough to choose the correct stock or mutual fund without having to consider after-tax returns. Similarly, calculating the tax consequences of selling a house may be a stressful ordeal in and of itself.

Capital gains income has traditionally been taxed at far lower rates than regular income, such as salaries, tips, unemployment compensation, gaming winnings, and the like. That’s because most politicians consider capital expenditures to be a vital economic stimulant and growth engine. The lower tax rates are meant to promote this positive behavior. Capital gains are treated favorably in many situations, not just in the purchase and sale of stocks and bonds. In this article, we’ll discuss taxes on capital gains in the US and other countries.

The U.S.

The federal government of the United States has multiple tax brackets for various forms of income. For example, if you sell a stock that you’ve owned for a while and made a profit, your capital gain will likely be taxed at a lower rate than your wage or interest income. Some forms of investment returns, however, are given preferential treatment. Short-term and long-term capital gains are taxed at vastly different rates. To be a successful investor, knowing the capital gains tax rate is crucial.

For most people, the maximum tax rate that may be applied to a net capital gain is 15%. If your taxable income is less than $40,400 for a single person or $80,800 for a married couple filing jointly or a qualified widow, you may be eligible to have all or part of your net capital gain taxed at 0%. The same rules go for taxes on gains from FX trading, which allows people from the U.S. and around the world to get profits with currency trading.

It should also be stated that the holding period determines how profits or losses from the sale or purchase of an asset are to be treated. Short-term capital gains are earnings on the sale of an asset held for a year or less. Conversely, long-term capital gains are realized through the sale of an asset that has been held for more than a year. Short-term and long-term capital gains are often subject to different laws and tax rates. Long-term capital gains often incur lower tax rates than their shorter-term counterparts. Similar criteria are used to classify capital losses as either temporary or permanent.

European Countries

Compared to the U.S. it should be stated that according to the EU regulations, the capital gain taxes are much higher. With a maximum rate of 42%, Denmark has the highest capital gains tax of the countries considered. At 35.2%, Norway’s top rate of capital gains tax is the second highest in the world. After that comes Finland and France, with respective percentages of 34 and 33.

The sale of long-held shares is not subject to capital gains taxation in a number of European nations. Belgium, the Czech Republic, Luxembourg, Slovakia, Slovenia, Switzerland, and Turkey all fall under this category. Greece and Hungary have the lowest rates of all nations that do impose a capital gains tax, at only 15%.

It should also be stated that if shares are kept for more than a year and are not used in the taxpayer’s company, they will not be subject to capital gains tax in Slovakia.

Germany no longer taxes interest income from foreign investors. Bank account holders’ anonymity is protected in this nation. Corporations that do not have a permanent U.S. location are not subject to federal income taxes on any international earnings, including dividends from foreign subsidiaries and profits from foreign branches.

Companies, interest, and licensing revenue all have relatively favorable tax treatment in the Netherlands. In addition to that, in 2019, the Netherlands received $84 billion in FDI, more than any other European country.

Many Germans choose to keep their money in Austrian banks because they provide account holders anonymity in return for their money. Foreign investors have found success in Austria’s bond market. The country’s strict banking secrecy led to its position as number 36 on the Financial Secrecy Index. For American corporations, the Netherlands looks to be the most popular tax haven, with more than half of the Fortune 500 maintaining at least one subsidiary there. Due to its favorable tax environment for international corporations, the Netherlands has seen a surge in the number of company headquarters and subsidiaries based there.