Do you know if you have any capital gains? Do you know what capital gains are? Capital gains aren’t just profit on stock sales. Capital gains are any profit you make from selling capital. Capital can be your home, a stamp collection, that antique velvet sofa you own, or any property you own personally. Just about everything you own is capital. When you sell it, that’s income. The IRS is keenly interested in your income so you have to declare your profit when you sell capital. The resulting tax is called the capital gains tax. Here’s what we have so far.
Capital = stuff you own
Capital gains = money you make when you sell your stuff
Capital gains tax = tax you pay the IRS on your profit from selling your stuff
How to Figure Your Capital Gains
If, when you tally up all your capital gains for the year and subtract your capital losses you come out ahead, then you’ll need to apply the capital gains tax rate to that profit. Good new is: it’s usually lower than your income tax rate.
But now we have to delve a little deeper and divide your capital gains into two categories. There are long term and short term capital gains. What’s the difference? A year.
Short Term Capital Gains vs. Long Term Capital Gains
If you owned something for less than a year before you sold it for a profit, then it’s a short term capital gain. This is most applicable when it comes to stocks. The IRS treats stock sales very differently depending on how long you held the stock before selling it. That’s because they want to encourage investing in stocks for the long haul, for retirement. That’s why the capital gains tax rate is nice and comparatively low. But people who invest in stocks and sell them in less than a year are more likely to be rich people playing the stock market. The IRS has no interest in helping them save money on their taxes so they tax those short term gains at a higher rate.
So, if you buy a stock, try and hold onto it for at least a year so you can get the lower capital gains tax rate. By the way, what is that lower tax rate? For
What’s the Capital Gains Tax Rate?
For short term capital gains, the tax rate is whatever your income tax bracket dictates. In other words, short term capital gains are taxed as regular income so the profit you make when you sell something you’ve owned less than a year will just be lumped together with your regular income.
For long term capital gains, the tax rate is 15%. This is speaking generally, since of course there are exceptions. For example, if you sell collectibles your capital gains tax rate goes WAY up, almost double, to 20%. There is also a much higher rate on profit from selling certain types of small business stock. See Publication 500 for more on that.
Then for a nice few years the poorer amongst us, those of us in the two lowest tax brackets, some or all of the long term capital gains were not taxed at all! This is over now, unfortunately. The 2013 Capital gains tax rate is back to 15% .
For more information on the IRS’s rules on the capital gains tax rate, Pub 550 goes in depth and covers every issue you may encounter when figuring your tax rate for selling your property. See the link above.