What is Capital Gains Treatment?

Capital gains treatment is a term that has to do with the amount of taxes that are applied to capital gains generated by investments. The tax codes of different countries determine exactly how the treatment is administered, including how it is calculated. A major focus of capital gains treatment is the profit, or lack thereof, that is generated when an investor chooses to sell a security.

The amount of time that the investor has held the security often has an impact on the capital gains treatment. Many tax codes apply different rates based on whether the investment is categorized as short-term or long-term. In most cases, if the investor has owned the security for less than one calendar year prior to selling it, the rates that apply to short-term investments will apply. Should the recently sold security have been in the possession of the investor for more than one calendar year, the tax rates that apply to long-term investments will be used to determine the capital gains treatment.

Since there is often a significant difference between the short-term and long-term rates that may be applied, investors normally make an effort to assess the impact that the sale will have on the overall tax burden for the period. While there is some variance between countries on how the rate tables are structured, the usual approach is for the tax rate on short-term capital gains to be higher than the tax rate for capital gains earned on long-term investments. Depending on the circumstances regarding the current performance of the investment, holding onto the security for a longer period of time may result in less of a tax burden.

For example, if the current rates for long-term investments held by an investor in a particular tax bracket are set at fifteen percent, and short-term investments have a rate of thirty percent, the investor will want to project the movement of that security over a longer period of time. Assuming that the asset will hold its value for long enough to be considered a long-term investment for tax purposes, he or she will save money by waiting to sell. If the asset is projected to undergo a significant decrease in value within a short period of time, selling now and incurring the higher tax treatment may translate into a smaller amount of loss overall. Investors will often look at the circumstances surrounding each potential sale of a security closely to determine the nature of the capital gains treatment, and then proceed accordingly.