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Capital gains tax is the profit you earn when you sell a non-inventory asset for more than you paid for it, with the most common assets including property, stocks, bonds, and precious metals. The capital gains tax laws are not implemented in all countries and the rates may vary from country to country as well as for different individuals and corporations. In the United States, the amount you pay on capital gains tax depends on if the assets were held short-term or long-term. Assets that are kept for less than a year are considered short-term gains while long-term gains refer to assets held for longer than a year. Short-term capital gains are taxed at the same rate as your normal income tax. A major concern or question to many is how it seems that the rich manage to avoid capital gains tax. One method of avoiding capital gains tax is by taking advantage of the "1031 exchange." The 1031 is part of the IRS code that exempts real estate investors from capital gains taxes on profits made on investment properties provided they use the proceeds towards purchasing other investment properties that have an equal or greater value. This is referred to as an "exchange." There are certain stipulations to this law, however. The seller of the property must have the intent to purchase new property and must name the property s/he intends to buy within 45 days of the sale of the current property. The new purchase must also take place within 180 days of the existing property's sale. The sellers must set up the transaction with a third party that is disinterested, or not involved, in the transaction, and the intent to purchase new property must be made to them before the sale of the first property. Another stipulation the IRS requires is that the property purchased as part of the exchange be held for a certain amount of time before selling it. This is to prove that the capital gains were actually used to make a purchase on an investment with the hopes of making income on the investment. Although the IRS doesn't stipulate what the "correct" amount of time is, the property should be held for two tax-filing years. This is one method that helps the rich avoid capital gains taxes because they have the funds and can afford to purchase investments and hang onto them for a couple of years and "ride them out," whether they increase or decrease in value. Middle-income and lower-income individuals usually need the capital gains as soon as possible, which is why they've originally made the investment. Another way the rich manage to avoid capital gains taxes is because they can afford to hold multiple investments simultaneously. Some will make money and some will lose money, but their portfolio is large enough that the losses offset the gains and they still manage to make money on their transactions.
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