Understanding Capital Gains and Taxes
Almost everything you own for personal use or investment is considered a capital asset. This includes property like a house, furniture, stocks, and bonds. When you sell a capital asset, the difference between what you paid for it and the selling price determines if you have a capital gain or loss. If you sell it for more than what you originally paid, you have a capital gain. If you sell it for less, you incur a capital loss. However, losses on personal-use items like your car or home are not tax-deductible.
Short-Term vs. Long-Term Capital Gains
The tax treatment of capital gains depends on how long you held the asset before selling it:
Short-term capital gains apply to assets held for one year or less and are taxed as ordinary income.
Long-term capital gains apply to assets held for more than one year and are usually taxed at lower rates.
Capital Gains Tax Rates
The tax rate on long-term capital gains depends on your taxable income. For 2024:
0% rate applies if your taxable income is below:
$47,025 for single filers and married individuals filing separately
$94,050 for married couples filing jointly
$63,000 for heads of household
15% rate applies to income within certain thresholds, which vary by filing status.
20% rate applies to higher-income taxpayers exceeding specific limits.
Some types of gains have different tax rates:
Sale of qualified small business stock may be taxed at 28%.
Sale of collectibles (art, coins, etc.) may be taxed at 28%.
Depreciation recapture on real estate is taxed at a maximum of 25%.
Deduction Limits and Carrying Losses Forward
If capital losses exceed capital gains, you can use up to $3,000 ($1,500 for married filing separately) to offset ordinary income. Any remaining losses can be carried forward to future tax years.
Reporting Capital Gains and Losses
Capital transactions should be reported on Form 8949, with a summary on Schedule D (Form 1040). Those with significant investment income might also be subject to the Net Investment Income Tax (NIIT).
Estimated Tax Payments
If you have significant capital gains, you may need to make estimated tax payments to avoid penalties.
Understanding how capital gains work can help you manage tax liabilities and make informed investment decisions.