Capital Gains Tax

The IRS wants to be your investment partner. Whenever you realize a gain in your assets, you may owe Uncle Sam a part of it. The capital gains tax is really a tax on the capital that builds up in investments. A capital investment can be a home, a business, artwork, or nearly anything that increases or decreases in value over a period of time. Almost half of all capital gains taxes are taxes on corporate stocks. Some collectibles also qualify for capital gains taxes, including art, antiques, precious metals and gems, and stamps. Capital gains taxes do not apply to anything you sell regularly through your business, which is classified as inventory.

Why Time Is a Factor

The IRS requires that you report gains and losses on investments in the year you realize the gain or loss. However, there are different tax rates for long-term and short-term gains. Short-term gains are taxed at your ordinary income tax rate, while long-term rates are lower. This is to encourage long-term investing.

Tax Rates

You may subtract your realized capital losses from your realized capital gains to calculate your net short-term gains and net long-term gains. If you have net capital gains, your maximum tax rates for those gains are shown in the table below.

If your losses exceed your gains, you can deduct up to $3,000 of net losses from your taxable income. Any losses over $3,000 carry over indefinitely to following years until they are used up.

There Are Other Rates for Other Investments

In addition, special rules apply for certain gains on real property and collectibles. For example, for collectibles, the maximum long-term tax rate is 28% rather than the 20% rate used for securities. Once every two years you can also deduct up to $250,000 from gain on the sale of a principal residence, owned and used for at least two of five years before the date of sale. This amount may be as much as $500,000 for a married couple filing jointly.

As you can see, understanding how capital gains are taxed can save you a considerable sum of money, and it is an important element in nearly any investment strategy.