Capital Gains Tax

Investing is a great way to bolster your financial security, but when the taxman cometh, things can get complicated quite quickly. One of the most often talked about types of investment taxes is capital gains taxes. In this article, we’ll give an overview of what these infamous taxes are and how they may apply to your situation.

What is Capital Gains Tax?

Capital Gains taxes are a type of investment income tax imposed on the sale of a capital asset. The IRS defines capital assets as “everything you own and use for personal purposes, pleasure, or investment.” This means that capital assets can include real estate, stocks, bonds, jewelry, and even NFTs or cryptocurrencies.

The current tax policy is structured such that capital gains tax only applies to assets which are held for more than one year, or long-term capital gains. The rate differs based on your tax bracket, and will be either 0%, 15% or 20%. Short-term capital gains—that is, assets held for less than one year—are taxed like regular income. Most of the time, this means that the long-term capital gains tax rate is lower than your standard income tax, incentivizing holding on to assets for a longer time.

Calculating Capital Gains Tax

Due to the volatile nature of asset values, especially some stocks and cryptocurrencies, gains and losses are not recognized for tax purposes until the asset is sold. This means you don’t have to pay taxes on your stocks or your home as the value of those increases over the years, but you will have to recognize all of the capital gains when you sell the asset.

You can sell capital assets at a loss—or for less than you purchased them for—to incur a capital loss. This will go against your capital gains, reducing the overall taxes that you owe. If you incur a net capital loss in one year, you may deduct up to $3,000 from your income; excess loss may be carried over into future years.

Capital Gains Tax Exceptions

1. Collectibles like jewelry, art, antiques precious metals, and other collections are taxed like your regular income. However, the tax rate will be capped at 28% if you hold them for more than one year.
2. Your Principal Residence is eligible for a partial exemption up to $250,000 in capital gains. This means that if you purchase a home for $150,000 and sell it for $500,000, you would only owe $100,000 in capital gains taxes.
3. Investment Real Estate can actually serve as a deduction if the property depreciates, but this will have to be paid back if the property is sold in the future. For example, if you purchase a property for $50,000 and it depreciates by $10,000, this means you can claim $10,000 of loss against your capital gains and reduce the amount of capital gains tax that you owe. If you later sold this property for $60,000, you would then owe $20,000 in capital gains tax on that investment property.
4. High-Income Filers may be subject to an additional 3.8% of taxation on all investment income, including capital gains, if your modified adjusted gross income exceeds a certain threshold.
5. Certain tax-shielded retirement accounts, like a 401(k) plan or an Individual Retirement Account (IRA), are not taxed within the account. This means that if you decide to trade securities within your retirement account, they will not be subject to capital gains tax.

Conclusion

Taxes can be complicated, so much so that even the IRS may miscalculate how much you owe. Thankfully, you have a right to challenge an IRS opinion with an attorney of your choice by your side. If you need to challenge an IRS decision, call the attorneys at Cornerstone Law Firm. The experienced tax attorneys can help you navigate the intricacies of tax law in filing your claim.