Introduction to Capital Gains Tax for Kids and Teens
This video explains the concept of capital gains tax in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about capital gains tax, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Middle School
- High School
The topics covered are:
- What is capital gains tax
- Long and short term capital gains tax
- Capital gains tax when selling multiple investments / Netting
- Tax when losses are more than gains
- Assets to which capital gains tax applies
What is Capital Gains Tax?
Capital gains tax is tax incurred on the increase in the value of your investments.
It needs to be paid when the investments are sold at a profit. If the stocks you own go up in value but you don’t sell them, you don’t pay any capital gains tax.
In the US, there are 2 types of capital gains: Long term and short term.
What are long and short term capital gains? And how are they taxed?
Long term capital gains is for investments that are held for over a year before they are sold. The profit from the sale of these investments can be taxed at 0, 15, or 20 percent depending on your income that year.
For example, in 2020, someone whose income is $50,000 would pay 15% tax on long term capital gains, but the capital gains tax would be 0% for someone whose income is $30,000.
Short term capital gain occurs when an investment is sold within a year of purchase.
It is added to regular income and taxed at the applicable income tax rate – which is usually much higher than long term capital gains tax rate.
If you sell multiple investments in the same year, how is the capital gains tax calculated?
If you are selling multiple investments in the same year, some at a loss and others at a profit, instead of just paying capital gains tax on the profits, you would first subtract the losses you incurred on some of the investments from the profits you made on other investments.
This gives you the “Net Capital Gain” – which is the amount of money that you pay capital gains tax on.
What do I do if my losses are more than my gains?
In that case, your net capital gain is negative, and you can roll over the loss to future years to decrease the amount of tax you pay in the future.
Are capital gains taxes only for investments?
Some of these assets may be taxed at a different capital gains tax rate than we talked about earlier. For example, collectibles are taxed at a flat 28% capital gains tax rate, irrespective of your income that year.