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 a capital gain 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.