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Income Tax vs Capital Gains Tax

Vincent Nyoike
Vincent Nyoike Tax

You must have heard about income tax and capital gains tax and you could be wondering what is the difference. Income tax is paid from employment, dividends, royalties, self-employment, and interest. On the other hand, capital gains tax is paid from income as a result of the sale or exchange of capital assets like property, stocks, bonds, or shares.

Short term capital gains are treated as ordinary income and are held for less than a year. Long term capital gains are derived from assets held for more than one year.

Difference Between Income Tax and Capital Gains Tax

In this article, we are going to focus on income tax vs capital gains tax and their differences.

What is Income Tax?

Income tax is a tax derived from a salary or wage, dividends, interest, self-employment, and royalties. The tax payable varies depending on your tax bracket. This all depends on the income you earn throughout the year. Tax brackets vary depending on whether you file taxes as an individual or jointly with your spouse. Most countries have a progressive tax income, meaning; if you earn less, you pay lower tax and if you earn more, you pay higher tax.

What is Capital Gains Tax?

Capital gains tax is paid from the sale or exchange of capital assets like property, stocks, shares, bonds, or cryptocurrency. Capital gains tax rates depend on how long the asset has been held. For instance, short term capital gains are for assets held for less than a year while long term capital gains are for assets held for more than a year.

Read also: Do you pay taxes on social security?

 Calculation: Income Tax vs Capital Gains Tax

Income tax is calculated based on your tax bracket depending on the amount you earn throughout the year. Low income earners are taxed less while high income earners pay higher taxes.

Capital gains tax rates depend on how long you have held an asset. Short term capital gains are taxed at a higher rate while long term capital gains are taxed at a lower rate.

Income Tax Vs Capital Gains Tax Comparison Table

Income Tax vs Capital Gains Tax
Income TaxCapital Gains Tax

Income tax is paid from salary or wage, dividends, interest, self-employment and royalties.

Capital gains tax is paid from income as a result of the sale or exchange of a capital asset like property, shares, bonds, or cryptocurrency. 

Income tax is calculated based on the income you make throughout the year.

Capital gains tax is calculated based on the profit you make from the sale of an asset like property.  

Income tax varies depending on your tax bracket.

Capital gains tax varies depending on how long you have held an asset; short term or long term.  

Summary of Income Tax vs Capital Gains Tax

tax laws vary from one country to another. Most countries require citizens and residents to file tax returns every financial year to determine their tax obligation. Capital gains tax on the other hand is based on the profit or gain you have made from the sale or exchange of a capital asset such as stocks or bonds. Capital gains tax is taxed depending on whether they are short term or long term.

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