Capital Gains

Capital gains are the increase in the value of a capital asset, like a stock, bond, or real estate. They occur when the asset’s selling price is greater than what you originally paid for it. You’re most likely to pay capital gains taxes on your profits when you sell shares of stock, a piece of property, or an interest in a business. You’ll also pay them if you sell shares of mutual funds or exchange-traded funds (ETFs). Many people think that capital gains only apply to investments, but they apply to just about anything you own. This includes your home, a car, a business, or a work of art.

Depending on your circumstances, you may be able to exclude up to $250,000 of your gains from taxation if you’re single or up to $500,000 if you’re married filing jointly. You’ll need to meet certain requirements, however. In addition, many states have their own capital gains tax rates. If you plan to retire in a state with high taxes, you’ll want to ensure you understand how those taxes will impact your finances.

Capital Gains Rules

Capital gains are profits you realize when you sell an asset that has risen in value. This type of gain is taxed at a lower rate than ordinary income because it’s treated as an investment rather than wages. However, it’s important to understand the rules and regulations surrounding capital gains. They can make a difference in the size of your tax bill and may also affect how you plan to invest.

Generally, you should subtract your cost basis from the sales price of an asset to determine whether it has a capital gain or loss. The cost basis is your original purchase price plus any settlement fees, closing costs, and commissions you paid for the transaction (excluding escrow amounts). You should be aware that there are special tax rules for certain types of assets, such as gifts of property or inherited property, patents, and commodity futures. For these investments, it’s important to consult a qualified tax advisor.

In addition, you should pay attention to the wash sale rule. This rule prevents you from offsetting a capital gain with a capital loss by purchasing the same or similar securities within 30 days before or after the asset’s sale. This rule applies to your taxable and brokerage accounts, so be sure to pay attention when you buy or sell securities.

In addition, there are a few special exceptions for capital gains on small business stocks. For example, 100% of the gain on stock held for more than five years in a domestic C corporation with gross assets under $50 million is tax-exempt. Additionally, net capital gains from the sale of collectibles such as coins or art are taxed at a maximum rate of 28%.

Capital Gains Tax

Your capital gains are generally taxable in the year you realize them. For example, if you purchase stock at $100 and sell it for $250, you realize $150 in capital gains. However, you might not owe capital gains taxes if you hold the asset for more than a year or don’t sell it. Short-term capital gains are taxed as ordinary income at your standard federal income tax rate, which tends to be higher than the long-term rates. In addition, you may have to pay an additional 3.8% surtax on net investment income (NII) if your taxable income is above $200,000 if you’re single or $250,000 if you’re married and filing jointly.

Long-term capital gains are taxable at 0%, 15%, or 20%, depending on your income level and where you fall in relation to the three cut-off points. These rates are generally lower than your ordinary income tax rate, but they can increase your adjusted gross income (AGI), which might affect your eligibility for certain deductions and credits. Some capital gains are taxed at a special rate, including gain on the qualified small business stock, Section 1250 gain (such as rental real estate income), and collectibles like art, antiques, stamps, coins or gold, or other precious metals.

In recent years, there have been a number of proposals to reform the capital gains tax system. Some of these include taxing capital gains at death, a system that would impose a capital gains tax every year until the assets were sold (this option is not without problems). Other reforms include a “mark-to-market” system, which would require investors to pay taxes on their capital gains each year as they accrue.