so there's been a lot of talk from the president lately about raising the capital gains tax rate
from 20 to 39.4 percent and it's suggested that the proposed rate will be one of the highest
capital gains tax hikes that we've seen in the last 100 years so naturally people have started
to want to know what capital gains tax rates are and how they will be impacted now most people know
about capital gains taxes from the real estate that they own but guys capital gains taxes extend
well beyond just real estate okay you have capital gains taxes on stocks you have capital gains taxes
on bonds you have capital gains on business investments and the sale of business assets and
you even have capital gains tax rates on high-end jewelry now here's the cool thing okay when you
fully understand capital gains taxes then guess what you are able to completely avoid them or at
the very least strategize to minimize well i like that strategize to minimize your tax liability
so in this video what i want to do is break down exactly what capital gains taxes are
share some examples with you and some calculations with you breaking down the numbers
talk a little bit about what the taxes pay for and then at the end share my personal opinion
about the capital gains tax proposal so if that all sounds good to you then stay tuned
all right let's go ahead and dive in by quickly explaining
what is a capital gains tax so basically if you own an asset and that asset appreciates in
value and then you sell it you can be subject to capital gains taxes okay but the key distinction
here is that you're only subject to capital gains taxes once you sell the asset and the
technical term for this is when you realize a gain hey sean look i can gain 500 pounds
okay kind of like that but on the other hand if you're holding a let's say you're holding a
stock and let's say you have some apple shares and those shares double in value after a short period
of time well as long as you hold those apple shares even though the value went up you won't
pay any capital gains taxes because you didn't sell it and the technical term for this is a
unrealized gain because well you didn't make any money yet there's no gains that you've realized
so basically capital gains taxes are when you sell an asset that is worth more than what you paid for
okay so it sounds really intense but it's actually very simple now i want to go back and look at the
history of capital gains tax rates before i do it's really important that you know the difference
between what are short-term capital gains and what are long-term capital gains the concept again here
is really simple okay so a short-term capital gain simply is when you have an asset and you sell it
in one year or less okay and the reason why this is so important to note is because short-term
capital gains usually have a different tax rate that is applied to them and as of right now for
the 2020 tax year short-term capital gains are taxed as ordinary income so basically whatever tax
bracket that you fall into let's say you're in the 24 tax bracket and then you sold an asset and that
asset went up in value well on that short term capital gain remember it's just a gain that is
taxed you will be taxed at 24 now let's go ahead and talk about what are a long-term capital gains
well as you probably guessed it a long-term capital gain is simply when you have an asset
and you sell it after holding it longer than one year and just like short-term capital gains
long-term capital gains have a different tax rate that is applied to them as well and right now
long-term capital gains tax rates can be zero percent 15 or even 20 okay it really just depends
on your income and your filing status but of course 20 is way less than 24 if you were in
that tax bracket all right so let's do an example as of 2020 let's say that you were single and you
made 40 000 or less you would actually have a zero percent long-term capital gains tax rate all right
now if you make forty thousand and one dollars to four hundred and forty one thousand four hundred
and fifty dollars then your long-term capital gain rate will be fifteen percent and if you make
and fifty 441 dollars or more than you fall in the twenty percent long-term capital gains tax
rate and of course the income threshold goes up if your filing status is married for example
because you have two people to count for instead of wayne but regardless you can see very clearly
there is an incentive for people to hold their assets for more than one year because remember
short-term capital gains are taxed at ordinary income so someone who is single in 2020 making 441
451 dollars would pay 35 if they sold their asset in the short term
or 20 if they sold it in the long term hey sean look i can extend my arms for the long term
okay so now that you have a general idea of capital gains tax let's go ahead and look back
at history all right now before i do if you're new to this channel hey i'm sean with life accounting
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that you guys love now let's go back and look at the history so here's a chart going back to 1922
which is about 99 years ago and as you can see the max long-term capital gains tax rate in 1922
was about 12 and as the economy grew and the government provided more infrastructure incentives
the capital gains tax rates grew as well then you see a blimp here or bump here in the 1970s
which of course is when the united states had unprecedented inflation rates and at that time
they needed to push asset prices down so of course that led to higher taxes and higher interest rates
and then for the last decade or so you can see that we've been somewhere between 15 to 20 capital
gains tax rates in the last 10 years now the white house is currently proposing that we raised a
max capital gains tax rate up to 39.6 percent if and this is a big one guys if you make over one
million dollars a year for those people we edited the chart and we made a slight adjustment so you
can see in comparison the tax rate that would be closer to the forty percent range now according
to irs data the people who will be impacted by this those people making more than one million
dollars a year represent point three percent of 150 million people who filed a tax return in 2018.
guys that's not even one percent of the population so most people who own stocks or real estate or
other assets that are subject to a capital gains tax should not worry at all and likely will still
sit somewhere between a 15 to 20 percent tax rate on their capital gains alright but you still
should probably know what you pay capital taxes on so let's go ahead and talk about some assets
that they apply to and then use an example that helps us make a decision if we're faced with
paying capital gains taxes now i want to go ahead and give you 10 assets where you can
be subject to capital gains tax rates but by no means is this a complete list all right
these are some of the main ones that i think you should be aware of all right so ready set
go stocks mutual funds collectibles bonds real estate machinery businesses vehicles and equipment
are all subject to capital gains tax rates alright so that's a lot of different assets now let's take
stocks and run some numbers for 2020 and make a decision together when we're faced with paying
capital gains taxes so let's say you bought apple stock six months ago and your cost basis for that
stock was ten thousand dollars fast forward to the day the market value of your apple stock
is twenty thousand dollars so you have a nice and even gain for this example of ten thousand
dollars after only six months now on the other hand let's say in the same tax year you earn
a hundred thousand dollars from your other income source and that puts you at the 24 tax
bracket so what should you do do you want to sell your stock or hold it
just like the games show deal or no deal the answer is almost impossible to predict because if
you sell your stock then you are subject to a 24 ordinary income tax rate which means of that ten
thousand dollar gain that you made in six months you can only take home seventy six hundred dollars
but if you hold the stock and the market value remains the same then you can move down to the
fifteen percent capital gains tax rate and keep eighty five hundred dollars but on the other hand
if you hold the stock and the stock market value decreases right let's say your gain went down to
seven thousand dollars well that is already less than the gain earlier at the seventy six hundred
dollar ordinary tax rate okay so there's a little bit of a puzzle a little bit of a pickle here
however what i want to say is that most wealthy people hold stocks as long as they can
and only take the money when they absolutely need it or during a year where they have no income
and that way they can get gains tax free so they leave with the whole ten thousand dollars and some
of them are willing to hold that stock for decades to realize those gains while avoiding taxes
all right now let's go ahead and talk about what capital gains taxes are actually used for so in
general when we pay taxes really any kind of taxes it basically pays for our government
services right things like the military social security etc specifically in 2021 what
the president is proposing is that we raise the capital gains taxes to do more for lower income
and middle income families okay stuff like raising the child care tax credits while at the
same time they want to use the money to improve infrastructure for our country so we can make more
capital gains as a country right so plus we have already spent trillions of dollars in the economy
and a lot of people believe that we need to pay back some of that money that we spent by raising
taxes and maybe even interest rates to get out of this deficit now of course right now i'm getting
into some territory that is a little bit more reserved for like an economic uh professional here
but i just want to say i'm not debating whether or not we should be spending trillions of dollars or
providing taxes to lower income families but hopefully this just gives you an idea of why
the president is proposing that we raise capital gains taxes in 2021 all right so what are some
of the outcomes of high capital gains taxes all right here is my personal opinion and perspective
on the capital gains tax proposal i personally think there are three scenarios that can come our
way number one asset prices may be pushed higher because there is less supply okay millionaires who
want to avoid paying taxes will continue to hold their assets longer to avoid taxes and of course
less supply means higher demand and higher demand means higher prices alright scenario number two
asset prices push lower because there is no incentive to hold assets for a long time if
the capital gains tax goes up and someone has been holding an asset that they really don't love
just for the tax savings then there is now no reason or incentive at all for them to
continue holding that asset so this could actually give millionaires more of a reason
to go ahead dump the stuff they don't like and sell all right and lastly scenario number three is
that there is no impact at all because we already know it's not going to impact lower or middle
income class families which makes up the bulk of economic activity in institutional investors and
millionaires have many many options when it comes to reducing their overall tax liabilities beyond
just holding their assets and the president does do some kind of infrastructure planning he's
going to need the help of corporations investors and millionaires to actually make that happen
and in return i'm pretty sure they're going to offer them tax credits and tax deductions
that they're able to take advantage of so that's probably gonna offset any capital gains taxes that
they wind up paying so that's just my thought process in the three possible scenarios that
i see playing out and of course i'm biased as a tax professional but i believe number
three is the most likely scenario and what i think they're planning to do of course at the end of the
day for us and the average person the biggest thing that we should worry about is focusing on
increasing our incomes and decreasing our tax liabilities as much as possible with the resources
that we have so make sure you subscribe to keep getting valuable tips on how to do just that
and again like this video if you gain any value from it at all as always thank you so so much for
watching i'm sean we have some more videos coming up next and i'll see you over there