You have to pay a capital gains tax whenever you make a profit for selling something that counts as capital. Almost everything you own for personal use can be counted as a capital asset, including real estate, furniture, stocks and bonds. Capital gains taxes are usually taxed at lower rates than income tax, usually staying under 15 percent, according to the Internal Revenue Service (IRS). Here is a guide to the basics of the capital gains tax:
Capital gainsWhenever you sell anything, you are required to pay taxes on your capital gains. Capital gains are the difference between how much you paid for an asset and the amount for which you sold the asset. In short, capital gains are the profits you have earned from the sale. Even assets you have received as gifts or as part of an inheritance are subject to capital gains taxes.
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Capital lossesIf you sold an asset for less money than you paid, you have incurred a capital loss. When filing for taxes, you may be able to lower the amount you have to pay by deducting your capital losses. Note that only capital losses on investment property (and not property for personal use) can be deducted.
Short-term versus long-termSavvy sellers should know the long and short of their sales, as long-term gains are generally taxed at a lower rate than short term. Short-term gains apply to property in your possession for under one year before sale. If you held the asset for over a year, your profit will be considered a long-term capital gain. To figure out how long you have owned the asset, you count from the day after you first acquired it until the day that the property is sold.
Net capital gainAll of these factors contribute to calculating your net capital gain, which is ultimately the amount that the IRS will consider. To calculate your net capital gain, take the sum of your short-term and long-term losses, then subtract that amount from your long-term gains. The net capital gain is used to determine the rate at which you will be taxed. The tax rate typically falls between 15 to 28 percent, according to the IRS. A low-income household may be completely exempt from paying a capital gains tax.
Net capital lossYour net capital loss is the sum of your short and long-term losses for the year. You can deduct up to a certain amount of net capital loss from your taxes, which would lower your overall taxable income. If you exceed the deductible limit, you can carry over the leftover losses to next year’s tax deductions.