Kinds of Income

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Holloway Guide ToEquity Compensation
Common questions covered here
What is the difference between ordinary income and capital gains?
For tax purposes, what are the different types of income?
What do I need to do to qualify for long-term capital gains?
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Kinds of Income

Definition Income is the money an individual makes. For tax purposes, there are two main types of income, which are taxed differently. Ordinary income includes wages, salary, bonuses and interest made on investments. Capital gains are the profits an individual makes from selling assets, including stock.

One key difference between ordinary income and capital gains is that when capital gains taxes are calculated, consideration is given not just to the sale price of the asset but to the total gain or loss the investment incurred, each outcome having significantly different tax consequences.

Definition Capital gains are classified as long-term or short-term. Long-term capital gains are the profits an individual makes from selling assets, such as stock, a business, a house, or land, that were held for more than a year. Short-term capital gains are profits from the sale of assets held for less than a year.

Although this topic is not without paidcontroversy, the general idea is, if you are selling something you’ve owned for a long time, you can be taxed a lower rate.

All these rates have evolved over time based on economic and political factors,* so you can be confident they will change again in the future.

new In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made many changes to tax rates for the 2018 tax year. Long-term capital gains taxes did not change significantly.

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