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Capital Gains Tax Rate History In United States
A capital gain the increase in the value of an asset compared to the original price of purchase. The asset can be a share of corporate stock, land, home, a piece of artwork etc. |
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The tax treatment of capital gains has recently attracted a lot of attention. Most people believe that if income is taxed, capital gains as well as capital losses should be treated like any other form of income while calculating taxable income. They conclude that in arriving to a person’s income, capital gains should be added to other sources of income while capital losses should be subtracted.
Unfortunately capital gains tax does not function that way.
Since the enactment of the federal income tax in 1913, capital gains have been taxable in the United State. From 1913 to 1921, capital gains tax rate were at ordinary tax rates up to a maximum rate of 7 percent. Then in 1921 the Revenue Act 1921 was introduced. This Act allowed the capital gains tax rate to increase to 12.5 percent on assets held for at least 2 years.
From 1934 to 1941, a taxpayer could exclude percentages of gains that varied with the holding period. That is 20, 40, 60 and 70 percent capital gains were excluded on assets that were held for 1, 2, 5 and 10 years respectively. Then came a period when a taxpayer could end up excluding 50 percent of capital gains on assets that were held for at least 6 months or alternatively choose a 25 percent alternative tax rate if his or her ordinary tax rate did not exceed 50 percent. This was in the beginning of 1942.
However, after that capital gains tax rate increased drastically in 1969 and 1976 following the new Tax Reform Acts which were introduced in both those years. In 1978, the government decided to reduce the capital gains tax rate by doing away with the minimum tax on excluded gains and increasing the exclusion to 60 percent. This meant that the capital gains tax rate ended up getting reduced to 28 percent. 1981 saw capital gains tax rate reducing even further to 20 percent.
With the enactment of Tax Reform Act of 1986, the capital gains tax rate was increased to 28 percent. However, with the 1990 and 1993 budget acts, the top ordinary tax rates were also increased so an alternative tax rate of 28 percent was provided for capital gains tax. Then in 1997, the new lower rates for 18 month and 5 year assets were introduced with the Taxpayer Relief Act.
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