Paralegal Advanced Competency Exam (PACE) Practice Exam

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Study for the Paralegal Advanced Competency Exam (PACE). Utilize flashcards and multiple-choice questions designed to enhance your knowledge of paralegal standards and competencies. Prepare effectively and increase your chances of passing!

Practice this question and more.

What is capital gains tax applied to?

Income from business operations
Financial gain from the sale of capital assets
Property taxes on real estate
Income from dividends and interests

The correct answer is: Financial gain from the sale of capital assets

Capital gains tax is specifically applied to the financial gain that results from the sale of capital assets. When an individual or entity sells a capital asset, such as stocks, bonds, real estate, or other investment properties, the difference between the selling price and the original purchase price (known as the basis) is considered a capital gain. If this gain is realized, it is subject to taxation, which is where the capital gains tax comes into play. This type of tax differentiates between short-term capital gains, which are usually taxed at the ordinary income tax rate, and long-term capital gains, which may be taxed at a lower rate, depending on how long the asset was held before selling. Understanding this concept is essential for individuals involved in investments and real estate, as it impacts their overall tax liability and financial planning strategies.