What are Capital Gain Taxes?
Anyone who sells a capital asset should be aware that they may be subject to capital gain taxes. And, as the IRS reminds out, almost everything you possess qualifies as a capital asset. This is true whether you purchased it as an investment, such as stocks or real estate, or for personal use, such as a car or a large-screen television. If you sell something for more than your “basis” in the item, you’ll have a capital gain, which you’ll have to disclose on your taxes. The price you paid for the item is generally your starting point. It comprises not just the item’s price, but also any additional fees and taxes you have to pay to get it, such as sales taxes, excise taxes, and other taxes and fees, shipping and handling expenses, and installation and setup charges.
Additionally, money spent on renovations that boost the asset’s worth, such as a new building addition, might be included to your base. The basis of an asset can be reduced via depreciation.
Here 5 things to know about Capital Gain Taxes;
1. Almost everyone has to pay capital gain taxes.
A capital gain taxes can be imposed on anybody who holds a capital asset, which does not necessarily involve investments. Your automobile, gadgets, jewelry, real estate, land, company interests, and so on might all be subject to capital gains tax. The amount of tax you may owe is equal to the difference between the price you sold an item for and the amount you paid for it. If you acquire ABC stock for $100 per share and it rises to $150 per share, you will have to pay capital gains tax on the $50 per share gain when you sell it.
Certain items might be added to the “basis,” or the price you paid for the asset. Consider the acquisition of a rental property. Let’s assume you pay $100,000 for an old house and then spend $50,000 renovating it and adding another bathroom. Your “basis” in the house is really $150,000, which is the whole amount you paid for it for tax reasons. So, if you sell the house for $225,000, you’ll only be taxed on the $75,000 in gains, which is the difference between the sale price and the initial purchase price.
2. There are two types of capital gains: short-term and long-term gains.
Short-term capital gain taxes are taxed as ordinary income since they are earned on assets held for less than a year. Long-term capital gains are gains from assets held for more than a year and are subject to reduced tax rates across the board. One of the reasons it’s beneficial to retain investments for a long time is that longer holding periods might result in lower taxation. Long-term gains are tax-free if you earn your marginal dollar in the 15% tax band, while short-term gains are taxed at a rate of 15%.
3. Capital gain taxes is the only voluntary tax
You must pay income taxes if you have a source of income. When it comes to capital gains, you have complete control over when they become taxed. Let’s say you pay $20 a share for a stock. After several years of phenomenal growth, the company’s stock now trades for $100 per share. You have a $80 per share capital gain, but you don’t have to pay taxes on it until you sell. Warren Buffett, the legendary investor, is well-known for using tax rules to his advantage by holding on to his wins indefinitely, deferring any gains taxes. When it comes to most assets, you have the last say on when to pay capital gains tax by determining when to realize the profit by selling at a profit.
4. Capital losses can offset capital gains
Many investors utilize a technique known as “tax loss harvesting” to realize capital losses and capital gains at the same time. Assume you hold two equities, one with a $10,000 profit and the other with a $10,000 loss. You want to cash in on the winner’s profit, but you don’t want to pay the taxes on it. That’s very understandable. It may make sense to sell both equities, realize the $10,000 gain on one and the $10,000 loss on the other, and report $0 in net capital gains in some instances.
5. In most cases, your house is excluded.
While most rental properties are subject to capital gains tax, main residences are exempt under specific circumstances. This is fantastic news, as our property is likely to be one of our most valued assets. If all three of the following requirements are satisfied, the IRS permits you to exclude part or all of the gain you’ve achieved in your house.
In the five years leading up to the sale, you had owned the house for at least two years.
During that same five-year period, you really resided in the house as your principal residence for at least two years.
You haven’t deducted the gain on a previous house sale in the two years leading up to the sale.
If all of these conditions apply to you, you can deduct up to $250,000 in gain if you’re single and $500,000 if you’re married filing jointly.