Understand The Two Different Kinds Of Capital Gain Taxes
Wed Feb 10, 2010, 2:19 am | Leave Comment
When you invest your money, for example, in stocks and then sell it at a profit, you have to pay taxes on the profit which is commonly known as capital gain taxes. When you sell it at a loss, obviously, you don’t pay taxes on your loss but you can offset it with any capital gains you have in that year.
There are two kinds of capital gain taxes – long-term and short-term and the taxes you pay have different rate attached to them. Even if you make a profit when you sell, your net that goes in your pocket can be different in both kinds of gains.
Long-Term capital gain taxes
When you sell an asset for profit after owning it more than one year – that’s one full year plus at least one day, the IRS considers the profit a long-term capital gain. It does not get added to your regular income and you pay taxes on it generally no higher than 15%. Your taxes on your regular income from other sources can be as high as 35%.
There are exceptions to this rule which include gains resulting from the sale of collectibles such as art or coins and from the sale of certain types of small-business stock, which may be taxed at a maximum 28% rate.
Short-Term capital gain taxes
When you sell an asset for profit after owning it for one year or less, the IRS considers that profit a short-term capital gain. This profit gets added to your regular income and you pay taxes on the total amount for the tax bracket you fall in. This can be as high as 35%.
Capital gains with capital losses
Keep in mind that the IRS allows taxpayers to offset capital gains with capital losses.
For example,
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Gains and losses are equal
Let’s say you have a $1,000 investment gain in the same year you report a $1,000 investment loss. You won’t owe taxes on the gain. Both balance out and the net effect is zero tax.
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Losses are more than gains
You can offset up to $3,000 of losses against ordinary income.
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Losses in excess of $3,000
They can be “carried over” and deducted from federal income taxes in future years.
Rules at the state level may vary so check with your state.
In a Nutshell
Even when you make a profit by selling your investment, you pay taxes at a different rate in both kinds of capital gains and the net money going in your pocket may be different – the difference between possible high of 35% and low of 15%. That’s 20% difference and depending on the size of your investment, it can be a substantial difference. So keep in mind the tax axe falling on long- and short-term capital gains.
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