When you sell assets for more than you paid for them, the profit you make is your capital gain – and, as with most income, it's taxable. Although the federal government generally taxes these profits at a lower rate than ordinary income, capital gains taxes can still represent a significant chunk of government revenue.
Although capital gains tax plays a prominent role in funding the government, its actual weight relative to other taxes collected on a year basis can vary significantly.
As Share of Individual Income Taxes
Capital gains taxes are folded into the individual income tax, which the Internal Revenue Service collects. A review of government revenue trends released by the Congressional Budget Office in 2010 found that capital gains taxes accounted for an average of about 9.2 percent of individual income tax revenue in fiscal years 1995 through 2009. However, the percentage varied significantly from year to year – as high as 11.8 percent in 2000 and as low as 6.3 percent in 2003.
As Share of All Income Taxes
The IRS doesn't just collect income taxes from individuals. Corporations pay income taxes, too. Figures from the Congressional Budget Office and the White House Office of Management and Budget show that for fiscal years 1995 through 2009, capital gains taxes as a share of all federal income taxes, both individual and corporate, averaged about 7.4 percent. This percentage, too, can vary considerably. For the period in question, it was as high as 9.8 percent in 2000 and as low as 5.4 percent in 1995. It should be noted that corporations also pay taxes on their capital gains. However, unlike individual capital gains, a corporation's gains are taxed at the same rate as its corporate income, so the IRS doesn't generally report them as a separate category of collections.
As Share of All Federal Revenue
Individual and corporate income taxes only account for about half of federal revenue. The bulk of the rest comes from social insurance taxes, such as Social Security, Medicare, federal unemployment taxes and excise taxes on things like alcohol and tobacco. Small amounts also come in from literally thousands of other sources, everything from passport processing fees to criminal and civil fines to broadcast license fees. As a share of total federal revenue from all sources, capital gains taxes averaged about 4.2 percent from 1995 through 2009. That ranged from a high of 5.9 percent in 2000 to a low of 2.8 percent in 2003.
Factors Affecting Receipts
Capital gains tax receipts tend to ebb and flow. One factor is the state of the economy. When stocks and other investments are rising, people see greater capital gains. When the economy is bad, the gains – if any – are smaller. At the same time, though, people in need of money may cash in some investments, paying capital gains taxes that they wouldn't have otherwise paid in a good economy. Capital gains rates also change over time. In general, gains on assets you hold for less than a year are taxed at the same rate as your regular income, while those held for a year or longer are taxed at a lower rate. The top rate for such "long-term" capital gains during the period discussed earlier was 28 percent until 1998, then dropped to 20 percent, and then to 15 percent in 2003.
- Congressional Budget Office; The Budget and Economic Outlook - Fiscal Years 2010 to 2020; January 2010
- Tax Policy Center; Federal Receipts by Source, 1934-2016; March 2011
- The Tax Foundation; Federal Capital Gains Tax Rates, 1988-2011; August 2010
- Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Accessed Nov. 4, 2020.
- Internal Revenue Service. "2019 Publication 550." Accessed Nov. 4, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Nov. 4, 2020.
- Internal Revenue Service. "2019 Publication 523." Accessed Nov. 4, 2020.
- Internal Revenue Service. "Questions and Answers on the Net Investment Income Tax." Accessed Nov. 4, 2020.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.