Understanding Capital Gains Tax
A capital gains tax is levied on the profits earned from the sale of capital assets. Capital assets include real estate, stocks, bonds, a piece of land, businesses, cars, and other tangible items. How much a gain is taxed depends on the length of time that the asset was held before being sold.
Long-Term vs. Short-Term Capital Gains Taxes
Long-term capital gains tax is levied on profits obtained from selling an asset that has been held for over a year. The holding period begins on the day after a person received the property and includes the day that he or she sold it. The tax rate is 20%, 15%, or 0%, depending on a person’s filing status and taxable income. Individuals in the lowest tax brackets usually do not pay tax on their long-term capital gains.
Short-term capital gains tax is levied on profits obtained from selling an asset that has been held for a year or less. The tax rates are equal to people’s ordinary income tax rates. They are generally higher than long-term tax rates, normally 10-20% higher.
When an investment is sold for less than the basis, a capital loss is incurred. The basis usually is what a person paid for the investment. It can also include other costs paid to acquire or improve the asset, such as installation, setup, shipping and handling, excise and sales taxes, and new additions to buildings.
Capital losses can be used to offset capital gains and lower capital gains taxes, a tip that tax attorneys in Las Vegas typically give to help people minimize their taxes. For instance, if a person made a $10,000 profit from the sale of stock this year and lost $4,000 in the sale of another stock, then he or she may be taxed on $6,000 worth of capital gains.
When capital losses are greater than capital gains by up to $3,000, an individual can use the loss to offset other income. If the losses exceed gains by more than $3,000, the amount above $3,000 can be carried over to future years to offset the income or capital gains in those years.
Someone who has sold his or her residence can exclude the gain from his or her capital gains tax if the following conditions are met:
- The person owned and lived in that home for a period totaling at least two years during the five years preceding the sale
- In the two-year period preceding the sale, the person did not exclude part or all of the gain made from the sale of another home
When these conditions are met, up to $250,000 can be excluded by a single person, whereas married people filing jointly can exclude up to $500,000.