Jonah Patel
Capital gains refer to the profits made from selling assets. These assets can include businesses, land, cars, boats, stocks, bonds, and other investment securities. The IRS categorises capital gains as either long-term or short-term, depending on how long the asset was held before it was disposed of. Long-term capital gains refer to profits made from assets held for more than a year, while short-term capital gains refer to profits from assets held for a year or less. The tax rates for capital gains vary depending on the length of time the asset was held and the overall taxable income of the individual. These rates can range from 0% to 20% for most individuals, with some exceptions where rates may exceed 20%. It's important to note that certain accounts, such as 401(k)s, IRAs, and other retirement plans, offer tax advantages where capital gains are taxed as ordinary income upon withdrawal rather than being subject to capital gains tax.
| Characteristics | Values |
|---|---|
| What is a capital asset? | Almost everything you own and use for personal or investment purposes. Examples include a home, personal-use items like household furnishings, stocks, bonds, businesses, land, cars, boats, and investment securities. |
| How is a capital gain made? | When you sell a capital asset for more than your adjusted basis in the asset. |
| How is a capital loss made? | When you sell a capital asset for less than your adjusted basis in the asset. |
| What is the difference between long-term and short-term capital gains/losses? | If you hold the asset for more than one year before disposing of it, it is a long-term capital gain/loss. If you hold it for one year or less, it is a short-term capital gain/loss. |
| How are capital gains taxed? | Capital gains are taxed at different rates depending on overall taxable income. For taxable years beginning in 2024, the tax rate on most net capital gains is no higher than 15% for most individuals. A capital gains rate of 0% applies if your taxable income is within a certain range. A capital gains rate of 20% applies if your taxable income exceeds the thresholds set for the 15% rate. There are exceptions where capital gains may be taxed at rates greater than 20%. |
| Are there any assets that are not subject to capital gains taxes? | Assets held within tax-advantaged accounts such as 401(k)s, IRAs, Roth IRAs, and 529 college savings accounts are not subject to capital gains taxes while they remain in the account. |
| How do investment losses affect capital gains? | Investment losses can be deducted from investment profits. You can claim up to $3,000 in losses per year, and any additional losses can be carried forward to future years. |
| How do you report capital gains/losses? | Capital gains/losses are generally reported on Schedule D (Form 1040), Capital Gains and Losses. Certain transactions may also need to be reported on Form 8949, Sales and Other Dispositions of Capital Assets. |
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What You'll Learn
Capital gains on tax-advantaged accounts
Tax-advantaged accounts are a type of investment, account, or plan that is either exempt from taxation, tax-deferred, or offers other types of tax benefits. They are a key part of a tax-efficient investment strategy, which aims to minimize an individual's tax burden and maximize returns.
There are two main types of investment accounts: taxable and tax-advantaged. Taxable accounts, like brokerage accounts, have no contribution limits or withdrawal penalties, but taxes must be paid when profits are made on investments.
Tax-advantaged accounts, on the other hand, allow individuals to defer or avoid taxes on their investing activities. Examples of tax-advantaged accounts include 401(k) plans, individual retirement accounts (IRAs), and 529 college savings accounts. In these accounts, investments grow tax-free or tax-deferred. For instance, with traditional IRAs and 401(k)s, taxes are paid when distributions are made in retirement. Roth IRAs and 529 accounts offer even bigger tax advantages, as money can be withdrawn from these accounts tax-free if the account rules are followed.
It is important to note that capital gains taxes are based on several factors, including the type of asset, how long the asset was held, and the overall income level of the individual. While tax-advantaged accounts can provide significant benefits, it is always recommended to consult with a financial or tax advisor to determine the most suitable investment strategy for your specific circumstances.
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Long-term vs. short-term capital gains
Capital gains refer to the profits from the sale of a capital asset. Capital assets can include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount realised from the sale is a capital gain or a capital loss.
Long-term and short-term capital gains are taxed differently. If you hold the asset for more than a year before selling it, your capital gain or loss is long-term. Long-term capital gains are taxed at a lower rate than short-term gains, with rates of 0%, 15%, or 20%, depending on your taxable income. For example, if you earn $100,000 a year, you're in the 15% tax bracket for long-term capital gains.
On the other hand, if you hold the asset for one year or less before selling it, your capital gain or loss is short-term. Short-term capital gains are taxed as ordinary income, with rates ranging from 10% to 37%, depending on your income and filing status. For instance, with short-term capital gains, you may be in the 24% tax bracket with an income of $100,000 a year.
The strategic practice of selling off specific assets at a loss to offset gains is called tax-loss harvesting. This strategy can help reduce your taxes by lowering your taxable gains. Additionally, if your net capital loss exceeds your net capital gains, you can offset your ordinary income by up to $3,000 ($1,500 if married filing separately). Any additional losses can be carried forward to future years to offset capital gains or ordinary income.
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Capital gains on inherited assets
If you inherit property or assets, you generally don't owe taxes until you sell those assets. Capital gains taxes are then calculated using what's known as a stepped-up cost basis. This means that you pay taxes only on the appreciation of the assets after you inherit them. For example, if your parents bought a home in the 1960s for $30,000 and by the time you inherit it, its value has increased to $430,000, you would only owe capital gains tax on the difference between the stepped-up basis value and the sale price when you sell the property. The stepped-up basis value is the property's fair market value as of the date of the previous owner's death. This provides a significant advantage to heirs by reducing the capital gains tax liability.
There are a few ways to reduce or avoid capital gains tax on inherited assets. One option is to disclaim the inheritance by signing a disclaimer with an attorney, voluntarily choosing not to inherit the property, and avoiding negative tax consequences such as being placed in a higher tax bracket. Another strategy is tax-loss harvesting, which involves selling off specific assets at a loss to offset gains. Additionally, you can subtract any expenses incurred from preparing the inherited asset for sale, such as closing costs, to reduce your capital gains tax exposure.
It's important to note that certain assets, such as income investments, retirement accounts, and ongoing businesses, may be subject to exceptions and generate revenue that is taxable upon inheritance. However, assets held within tax-advantaged accounts, such as 401(k)s or IRAs, are generally not subject to capital gains taxes while they remain in the account. Instead, you may pay regular income taxes upon withdrawal, depending on the type of account.
Capital gains taxes on inherited assets are typically levied only on the profits made from the sale of those assets. The tax rates vary depending on overall taxable income, with most individuals paying no more than 15% for long-term capital gains in taxable years beginning in 2024. Short-term capital gains, resulting from assets held for one year or less, are taxed at higher ordinary income tax rates.
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Capital gains on sold investments
Capital gains refer to the profits from selling an asset. The IRS taxes your net capital gain, which is your total long- or short-term capital gains (investments sold for a profit) minus the corresponding long- or short-term total capital losses (investments sold at a loss).
The tax rate that applies to your capital gain depends on your overall taxable income. For example, for taxable years beginning in 2024, the tax rate on most net capital gains is no higher than 15% for most individuals. A capital gains rate of 0% applies if your taxable income is within a certain range, depending on your filing status. A capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate. There are a few other exceptions where capital gains may be taxed at rates greater than 20%. For instance, the taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate, and long-term capital gains on "collectible assets" such as coins, precious metals, antiques, and fine art can also be taxed at a maximum of 28%.
The length of time you hold an asset before selling it determines whether your capital gain or loss is long-term or short-term. Generally, if you hold the asset for more than one year before selling it, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term. Short-term capital gains are treated as regular income and are taxed at higher rates than long-term capital gains. Therefore, it is typically more advantageous to hold an asset for longer than a year to qualify for the long-term capital gains tax rate.
It is important to note that capital gains taxes do not apply to all assets. Assets held within tax-advantaged accounts, such as 401(k)s or IRAs, are not subject to capital gains taxes while they remain in the account. Instead, you may pay regular income taxes when you make a qualified withdrawal, depending on the type of account. Additionally, investments that produce dividends may be considered a capital gain even if you haven't sold the investment.
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Capital gains on sold personal property
Capital gains refer to profits from the sale of a capital asset. Capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you make from the sale is a capital gain or loss. The adjusted basis of an asset is usually its cost to the owner, but if you received the asset as a gift or inheritance, its basis may be different. You have a capital gain if you sell the asset for more than your adjusted basis, and a capital loss if you sell it for less.
Capital gains on personal-use property, such as your home or car, are taxed differently from those on investment property. If you sell your primary home for more than you paid for it, you may be subject to capital gains tax on some of the sale. However, the IRS allows you to exclude a certain amount of the profit from your taxable income. Single filers and married people filing separately can exclude up to $250,000 of capital gains, while married couples filing jointly can exclude up to $500,000. If your profit exceeds this threshold, you may owe capital gains tax on the remaining amount.
The length of time you owned the asset before selling it also affects the tax rate. If you sell an asset that you owned for more than a year, your capital gain or loss is long-term, and the tax rate is typically 0%, 15%, or 20%, depending on your income and filing status. If you sell an asset that you owned for one year or less, your capital gain or loss is short-term, and the tax rate is the same as your ordinary income tax bracket, which can be as high as 37%.
It's important to note that certain assets are exempt from capital gains taxes. For example, assets held within tax-advantaged accounts, such as 401(k)s or IRAs, are generally not subject to capital gains taxes. Instead, you may pay regular income taxes when you make a qualified withdrawal from these accounts. Additionally, if your capital losses exceed your capital gains, you may be able to claim a deduction on your taxes to lower your taxable income.
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Frequently asked questions
Capital gains are profits you make from selling an asset. Typical assets include businesses, land, cars, boats, and investment securities such as stocks and bonds.
Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments.
Capital gains are the difference between the adjusted basis in the asset and the amount realised from the sale. Generally, an asset's basis is its cost to the owner.
Long-term capital gains refer to profits from assets held for more than a year. Short-term capital gains refer to profits from assets held for a year or less.
Net capital gains are taxed at different rates depending on overall taxable income. For taxable years beginning in 2024, the tax rate on most net capital gains is no higher than 15% for most individuals.
