ACCA Taxation (F6) Practice Exam

Are capital gains taxes assessed before or after income tax?

1. Before income tax

2. After income tax

3. They are independent of income tax

4. They aren't taxable

The correct answer is: After income tax

Capital gains taxes are assessed after income tax. This means that individuals first calculate their taxable income, which can include wages, salaries, and other sources of income. Once the income tax is determined, any capital gains realized from the sale of assets are then calculated and taxed accordingly. It's important to understand the distinction between ordinary income and capital gains. Ordinary income is taxed at the individual's marginal tax rate, while capital gains may be subject to different tax rates, often lower than those applied to ordinary income, depending on how long the asset was held. Typically, short-term capital gains (from assets held for less than a year) are taxed as ordinary income, while long-term capital gains benefit from preferential rates. Capital gains taxes are not independent of income tax, as they are assessed as part of the overall tax situation of an individual. This connection affects tax planning strategies and how individuals manage their investments to optimize their tax obligations. There are also specific regulations about how much of a capital gain must be reported and when taxes are due, which further ties the assessment of capital gains to overall income tax calculations.