With tax season in full swing, it’s time to figure out what you owe (and what might be owed to you). One of the questions that many have, especially if they have been investing, has to do with capital gains. Many people have questions about how their capital gains are taxed.
Before you file your tax return, make sure you understand the different taxes that you might pay on capital gains.
What are Capital Gains?
A capital gain is the increase in an asset at the time you sell. When you sell at a profit, the increased value of that asset (often an investment or real estate), is known as your capital gains. When you have capital gains, you pay taxes on the increase.
Long-Term vs. Short-Term Capital Gains
One of the first things that you need to understand is the difference between long-term capital gains and short-term capital gains. Long-term gains are those on assets held for longer than a year. So, if the aset as been held for a year and a day, it is considered a long-term asset.
On the other hand, short-term capital gains are those that are made on assets held for a year or less. Short-term capital gains are taxed as regular income, so you pay taxes depending on your marginal tax rate. Long-term capital gains, however, are subject to different tax rates. Right now, the top rate for long-term capital gains is 15%. For those in the lower tax brackets, there is no need to pay taxes on long-term capital gains. The top rate for long-term gains might rise, but it is unlikely that they will rise as high as the highest marginal tax rate.
Other Capital Gains Tax Rules
It is worth noting that the capital gains you see from selling a home (your primary residence) are exempt up to a certain point. Once you meet the requirements, you are exempt from paying taxes on up to $250,000 of capital gains for a single person, and $500,000 for those married filing jointly. Realize, too, that there are rules related to selling a home that you have used to get a home office tax deduction, as well as rules related to selling investment properties.
You should also understand that the capital gains on collectibles. Collectibles are are taxed at a 28% capital gains rate, regardless of how long you’ve held them. Understand that some tangible and physical investments, like physical gold, are considered collectibles and are taxed accordingly (except in the case of jewelry).
Before you sell an appreciating asset, it’s important that you consider the tax implications involved. If you are in a higher tax bracket, you might be able to save on taxes by making sure that you sell long-term assets so that your gains are subject to a lower rate. Also, be aware of additional rules involving capital gains. If you have questions, you should consult a knowledgeable tax professional who can help you determine the best tax strategy to follow, as well as help you understand exactly how much you owe.