What is a capital gain?
A capital gain occurs when an asset is sold for a price higher than the purchase price. This gain is a taxable event that must be claimed on your income taxes. If you sold an asset for less than what you paid for it, you could have a loss. Today's post will only be covering what happens in the event of a gain.
Calculating your capital gain may not be as simple as subtracting your purchase price from the sales price. If you incurred certain expenses towards the asset which improved the asset or added to your investment, those costs would also be added into your purchase price or "cost basis."
How are capital gains clasified?
Capital gains are classified in two depending on how long you own them:
In general, if assets are held for one year or less, they are considered short-term. If they are held for longer than one year, they are considered long-term.
There are certain assets subject to exceptions, such as the sale of horses or cattle. We'll cover that exception in a later post.
How are capital gains taxed?
There is a significant difference on how the two types of capital gains are taxed.
Short-term capital gains are taxed as ordinary income based on the individual's tax filing status and adjusted gross income.
Long-term capital gains are taxed at a lower rate than regular income and the brackets are as follows:
20% tax: Single w/ $441,451+ income or married filing jointly w/ $496,601+ income.
15% tax: Single w/ $40,001 to $441,450 income or married filing jointly w/ $80,001 to $496,600 income.
0% tax: Single w/ $40,000 or less income or married filing jointly w/ $80,000 or less income.
Most individuals will fall in the 0% or 15% capital gains tax rate.
Click here to read more details about how capital gains are taxed.
This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter.
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