What Is Capital Gains Tax?
A capital asset is basically anything that you own/use for personal or investment purposes.
This can include stocks, bonds, home furnishings, and the home itself. When you sell a capital asset, the difference between your “basis” (usually the amount you paid for it) and what you sell it for is called capital gains or loss.
If you sell an asset for more than your basis, you have a capital gain. Conversely, if you sell an asset for less than your basis, you have a capital loss.
Here are some facts about capital gains and losses:
- Capital gains are either short-term or long-term, depending on how long you hold the asset before selling it. If you hold it for more than one year, it is considered a long-term capital gain or loss. If you hold it for a year or less, it is a short-term capital gain or loss.
- If your long-term capital gains for the year are greater than your capital losses (including short-term and long-term losses), then you have a “net capital gain.”
- Net capital gains are subject to tax. The amount of your tax depends on your tax bracket and whether the asset is short-term or long-term.
- Short-term capital gains are taxed at your regular income tax rate. The maximum tax rate for long-term capital gains is 15% for most taxpayers (for 2009). Particular types of long-term capital gains are taxed at 25% to 28%. Some lower-income individuals may even qualify for a 0% tax rate on their net capital gains.
- Net capital losses can be claimed for a tax deduction. If you have more capital losses than gains, you may be able to deduct the difference on your tax return to reduce your taxable income.
- All capital gains and deductible capital losses must be reported to the IRS using Tax Form 1040, Schedule D (Capital Gains and Losses). The information reported on Schedule D must also be recorded on Line 13 of Tax Form 1040.
Understanding what capital gains and losses are will help you make the right decisions in the future.