Capital gains are the positive difference between the sale price and the purchase price of property that is a capital asset. Some examples of capital assets are a home, personal-use items such as household furniture, stocks, and bonds.
If the sale price exceeds the purchase price, the capital gain is considered a form of taxable income. Income from the sale of real estate and stocks is a common form of capital gain. Conversely, there is no effect of capital losses on your income tax, meaning you do not receive a tax deduction if you lose money from the sale of your property.
What Are the Capital Gains Tax Rates?
Capital gains tax rates depend on several factors, including your current tax bracket and the length of time that you owned the property that has produced your capital gain. Usually, a property held for one year or less than one year is considered "short term" and will be taxed at a higher rate than "long term" properties, which are held for more than one year. In deciding the length of time you held the asset, start counting from the day after the day you obtained possession of the asset until the day you sold the asset.
If the sale of your asset results in a "net capital gain," then that gain may be subject to a lower tax rate than your ordinary income. Net capital gain is the amount by which your long-term capital gain exceeds your net short-term capital loss. Net long-term capital gain is the difference between long-term capital gains and long-term capital losses, including any unused capital losses carried over from prior years.
Usually, for the majority of taxpayers, net capital gains are taxed at a maximum rate of 15%. If your ordinary income tax bracket is within the range of 10% to 15%, then the tax rate of part, or all, of your net capital gain, may be 0%. However, starting in 2013, a 20% rate was applied to the degree to which your taxable income is greater than the thresholds for the new 39.6% ordinary tax rate. Net short term capital gains are taxed at the same rate as ordinary income.
Can an Attorney Help Me Avoid Capital Gains Taxes?
Federal income taxation is a very complicated area of the law, and a tax attorney can help you manage your assets in a way that reduces your tax liability. An attorney can also help you protect your assets for your family once you are gone. If you are seeking tax advice on how to lower or avoid paying capital gains taxes, you should consult an attorney.