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?
Although capital gains tax is usually paid on stocks and other investments, it applies to all capital assets which include real estate, jewelry, cars, collectibles like art and coins, etc.
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.
Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens
Podcast: What is Capital Gains Tax
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
Everything you need to know about capital gains tax: What is Capital Gains Tax, What are long and short term capital gains, How are long term capital gains and short term capital gains taxed, If you sell multiple investments in the same year how is the capital gains tax calculated, What do you do if your losses are more than your gains, Are capital gains taxes only for investments, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/capital-gains-tax-for-kids-beginners/