Home Capital Gains Tax What to Know About Capital Gains Taxes

What to Know About Capital Gains Taxes

What to Know About Capital Gains Taxes

When it comes to taxes, capital gains taxes can often be confusing and overwhelming. However, they are an important aspect of the tax code that every taxpayer should understand. Capital gains taxes are the taxes on the profit earned from the sale of a capital asset, such as stocks, bonds, real estate, and collectibles. This article will cover everything you need to know about capital gains taxes.

What Are Capital Gains Taxes?

As mentioned, capital gains taxes are taxes on the profit earned from selling a capital asset. When you sell a capital asset for more than you originally paid for it, you have a capital gain. Conversely, if you sell the asset for less than you acquired it for, you have a capital loss. The taxes you’ll have to pay on the gain depend on how long you held the asset before selling it.

Short-Term Capital Gains Taxes

If you hold an asset for one year or less before selling it, the gains you make are considered short-term capital gains. Short-term capital gains are taxed at the same rate as your ordinary income or income tax rate. For example, if you are in the 22% tax bracket, you will pay a 22% capital gains tax rate on any short-term capital gains.

Long-Term Capital Gains Taxes

If you hold an asset for one year or more before selling it, the gains you make are classified as long-term capital gains. Long-term capital gains tax rates are typically lower than short-term capital gains tax rates. The exact rate depends on your income and the type of asset you sold.

The maximum tax rate for long-term capital gains is 20%, but many taxpayers pay less than this. For example, if you are in the 10% or 12% income tax bracket, you will pay no long-term capital gains taxes. If you are in the 15% income tax bracket, you will pay a long-term capital gains tax rate of 15%. For taxpayers in the 22%, 24%, 32%, 35%, and 37% tax brackets, the long-term capital gains tax rate is 15%.

What Assets Are Subject to Capital Gains Taxes?

Capital gains taxes are applicable to any asset owned by an individual that can be sold for a profit. These include:

1. Stocks and Bonds – If you sell shares of stocks or bonds for more than you purchased them, you will be subject to capital gains taxes.

2. Real Estate – When you sell a property for more than you purchased it, you will be subject to capital gains taxes.

3. Collectibles – Collectibles such as artwork, antiques, and jewelry are also subject to capital gains taxes.

4. Business Assets – If you own a business and sell assets such as equipment, machinery, or inventory for more than you paid for it, you will be subject to capital gains taxes.

Exclusions and Exemptions

There are certain exclusions and exemptions available to taxpayers that can help lower or even eliminate their capital gains tax liability. Some of the most common exclusions and exemptions include:

1. Primary Residence – If you sell your primary residence for a profit, you may be able to exclude up to $250,000 (or $500,000 if married filing jointly) of your gain from your taxable income.

2. Retirement Accounts – If the asset you sell is held within a retirement account such as a 401(k) or IRA, you won’t face any capital gains taxes until you withdraw the funds.

3. Inflation – The cost basis of an asset is adjusted for inflation when calculating capital gains taxes. This means that if you sell an asset for more than its original purchase price, but its value hasn’t kept up with inflation, you’ll pay less tax.

4. Losses – If you experience capital losses in the same tax year as your gains, you can offset your gains with those losses and reduce your tax liability.

5. Charitable Donations – If you donate appreciated assets to a nonprofit organization, you may be able to avoid paying capital gains taxes and receive a tax deduction for the value of the donation.

Reporting Capital Gains Taxes

If you have realized a capital gain, you will need to report it on your tax return. The IRS form specifically used to report capital gains is Form 8949. The form provides a space for you to list all of your capital gains and losses for the year.

If you receive a Form 1099-B from your broker, you must report the information from the form on your tax return. The form provides the gross proceeds from all stock and bond sales, as well as the purchase price. If you are missing any of this information, you will need to contact your broker to get it.

Final Thoughts

Capital gains taxes can be complex, but it is important to understand them as part of your overall tax strategy. It’s essential to keep track of all gains and losses throughout the tax year and report them accurately when filing your tax return. If you’re ever uncertain about your tax liability, speak with a qualified tax professional to help you navigate the process. By staying informed and taking advantage of available exclusions and exemptions, you can reduce your tax liability and keep more of your hard-earned money.


Capital gains are income made from a source other than work. Capital gains can include money made at garage sale, money made from selling stock or money made from selling a home.In fact, there are many types of income that are considered a capital gain.

Capital gains taxes are applied to that income, in much the same way as an income tax. Capital gains are added to the individuals income after any allowable losses have been subtracted.

There are a myriad of deductions allowed against capital gains, including any capital losses. For example, an individual that lost money during the sale of their home, could subtract that loss from any capital gains. The capital gains tax would only be applied to the actual gain.

Many types of capital losses are allowed to be deducted until the full value of the loss has been deducted from any capital gains, even if it takes several years to cover the loss. However, individuals can only deduct an amount that is equal to or less than their capital gains for that year.

If an individual  were to take a capital loss of ten thousand dollars in one year, they may have only had a capital gain of five thousand. That individual would then be allowed to carry over the capital loss into the next year and use it as a deduction against future capital gains.