NCPA - National Center for Policy Analysis

The Capital Gains Tax Sometimes Taxes Losses

January 8, 2015

The capital gains tax is a tax on income from the sale of an investment. But does it always tax profits? Kyle Pomerleau, an economist with the Tax Foundation, explains how the capital gains tax can impose taxes even when an individual loses money.

Currently, the capital gains tax rate is 23.8 percent. If an individual purchases stock for $10 and then sells it for $100, his capital "gain" is $90.

However, that gain does not take into account inflation -- an increase in prices, and fall in the value of money, over time. Pomerleau provides an example of an individual who had purchased stock for $89.18 in the year 2000. Thirteen years later, he sells the stock for $100, seemingly making a gain of $10.82. The government would impose a 23.8 percent capital gains tax on that $10.82, charging the person $2.57 in taxes.

Adjusting these numbers for inflation, however, tells a different story. Pomerleau explains that the $10.80 gain was really a loss of $4.88 due to the inflation that took place over that period. Unfortunately for taxpayers, the IRS still collects the tax. Pomerleau advocates doing away with the capital gains tax altogether because of its negative impact on investment and savings or, at the very least, linking the tax to inflation.

Source: Kyle Pomerleau, "How One Can Face an Infinite Effective Tax Rate on Capital Gains," Tax Foundation, January 7, 2015.             


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