Capital Gains Tax

Table of Contents
Chapter 1: Manage Your Taxes
Chapter 2: Estimated Tax Payments
Chapter 3: Capital Gains Tax
Chapter 4: Tax Planning & Filing Your Taxes
Chapter 5: Lowering Your Tax Liability
Chapter 6: Tips for the First Time Tax Payer

Capital Gains Tax

You have to report and pay the capital gains tax if you have made a profit on your capital investments. A ‘capital gain’ is the difference between the purchasing price and the selling price of the asset. If you are profited by the sale of your investment, it is called a capital gain; otherwise, it’s called a capital loss.

Capital Assets or Investments

Only the gains from capital investments, including investment in precious metals, stocks, bonds, mutual funds, real estate, fine art, coins and other collectibles, are considered for calculating the capital gains tax. But if you have profited from your tax-deferred investments like IRA accounts or the 401k, you won’t have to pay a tax on it till you withdraw the money.

You can calculate your capital gains by following these simple steps:

  • Take the selling price of the asset
  • Subtract the selling costs and commission paid by you from the selling price
  • Next, subtract the purchasing fees and commissions paid by you
  • Finally, subtract the purchasing price from the balance to get your capital gains or losses

The tax rate on your capital gains is based on the type of asset you hold and for how long you’ve had it.

Holding Period

Capital gains tax differs for your short-term investments and long-term investments. An investment held for a year or less is considered as a short-term investment whereas long-term investments are investments held for more than a year. While the short-term capital gains tax is calculated at ordinary income tax rates, the long-term capital gains tax is calculated at discounted long-term capital gains rates.

Asset Type

Different assets types are given different capital gains tax treatments. The rules, tax percentages and the exemptions differ from asset to asset.

Collectibles like stamps, coins, valuable gems & stones, antiques, fine arts and so on are taxed at a flat 28% if they are long-term investments and at ordinary income tax rates if they are short-term investments.

Real-estate capitals gains are taxed based on their holding period and how they are used. If you’ve owned and lived in the house for at least two years, $250,000 ($500,000 for married couples) can be excluded from the profit from sale.

In case you’ve sold the house or lived in it for less than two years because of health concerns, change in location of job or unforeseen circumstances like natural disasters, acts of terrorism or war, death, divorce etc, you may be allowed to exclude a part of your profit, provided you submit the necessary documents to verify your reasons.

Any profits from sale of business assets like furniture and equipment is not a capital gain.

Capital gains for mutual funds are measured by considering the profit in each share of the fund as each share has its own fund costs and holding period.

Under section 1202, capital gains on stocks of small businesses may be partially excluded if the company’s asset value is $50 million or less and the remaining part of the gains is taxed at 28%.

Paying Capital Gains Tax

The capital gains tax needs to be filed by filling the Form 1040 Schedule D. This form, which has organized columns like a spreadsheet, allows you to fill in the important information about each and every investment you sold in that particular year. Your net gain or loss is calculated by considering the loss or gain from each asset.

Next: Tax Planning & Filing Your Taxes