In a bear market year, it’s more important than ever for taxpayers to know how capital gains tax works. This article will provide an overview of the basics of capital gains tax, including what triggers it, how to report it, and which types of investments are subject to it. Knowing the ins and outs of capital gains tax is critical for minimizing your tax liability in any market conditions. So read on for everything you need to know about this important topic!
What are Capital Gains?
When it comes to taxes, capital gains are profits realized from the sale of certain types of assets. These assets can include stocks, bonds, mutual funds, real estate, and even some collectibles. If you sell an asset for more than you paid for it, the difference is considered a capital gain. For example, let’s say you bought a stock for $50 per share and sold it later for $100 per share. In this case, your capital gain would be $50 per share.
Capital gains can be either short-term or long-term. Short-term capital gains are realized on assets held for one year or less, while long-term capital gains are realized on assets held for more than one year. Short-term capital gains are taxed at your regular income tax rate, which could be as high as 37% for some taxpayers. Long-term capital gains, however, are taxed at a lower rate: 0%, 15%, or 20%, depending on your tax bracket.
What Triggers Capital Gains Tax?
You only owe capital gains tax when you sell an asset for a profit. So if you hold onto an asset until it’s worth less than what you paid for it (known as a capital loss), you won’t owe any tax on the sale. Capital losses can be used to offset capital gains, which can lower your overall tax liability. For example, let’s say you have $10,000 in short-term capital gains and $5,000 in short-term capital losses. In this case, you would only owe capital gains tax on the $5,000 in net gain.
How to Calculate Taxable Capital Gain
The amount of taxable capital gain is determined by subtracting the cost basis (what you paid for the asset) from the proceeds (what you sold it for). So if you sold an asset for a profit of $1,000 and your cost basis was $500, your taxable capital gain would be $500.
Capital Gains Tax Rates
As we mentioned earlier, long-term capital gains are taxed at a lower rate than short-term capital gains. The exact rate you’ll pay depends on your tax bracket. For 2019, the long-term capital gains tax rates are 0%, 15%, or 20% for most taxpayers. However, there is an additional 3.8% surtax on long-term capital gains for high-income taxpayers.
Tax Loss Harvesting and Carryover of Capital Losses
If you have more capital losses than gains in a given year, you can use the losses to offset the taxes owed on the gains. This is called “tax loss harvesting.” Any unused losses can be carried over to future years and used to offset gains in those years.
Reporting Capital Gains Tax on Your Return
All capital gains must be reported on your tax return, even if you don’t owe any tax on them. Short-term capital gains are reported on Schedule D of Form 1040, while long-term capital gains are reported on Form 8949. Be sure to keep good records of all your investments so that you can accurately report your gains and losses come tax time.
State and Local Taxes on Capital Gains
In addition to federal taxes, you may also owe state and local taxes on your capital gains. These taxes vary by jurisdiction, so be sure to check with your state and local tax authorities for the latest information.
Other Strategies for Managing Capital Gains Tax (More Tips!)
There are a few other strategies you can use to minimize your capital gains tax liability. One option is to invest in assets that are eligible for special treatment, such as certain types of bonds or mutual funds. Another option is to wait until you’re in a lower tax bracket to sell assets that have appreciated in value. And finally, you can consider using a professional CPA to help you manage your taxes and maximize your deductions.
Work With a Professional CPA and save Yourself headaches and stress
A certified public accountant (CPA) can help you navigate the complex world of taxes and minimize your liability. CPAs are trained tax professionals who understand the ins and outs of the tax code and can help you take advantage of all the deductions and credits you’re entitled to. If you’re worried about capital gains taxes, a CPA can help you develop a strategy to minimize your tax liability.
The bottom line is that capital gains taxes can be complex, but with a little planning and some expert help, you can keep more of your hard-earned money in your pocket.
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