What are capital gains taxes? Do I have to pay them? How do you calculate the amount owed? If you’ve ever wondered any of these questions then this is the article for you. We’ll be answering all of your burning questions about capital gains taxes, so read on!
First things first, what are capital gains taxes ? Simply put, capital gains taxes are the amount of money you need to pay on your investment earnings. For example, if you buy a stock at $100 and it goes up to $110 within a year then that’s a $10 gain that will be taxed.
Even though this is our limited definition of capital gains , there’s actually much more to it than that. This article will be broken up into several sections so you can get the answers to your questions easily and quickly.
How are capital gains taxes different from income taxes? How much do I need to pay in capital gains taxes? What kinds of investments generate taxable gains ? Are there any exceptions to the rule? If you’re eager to find out the answers to these questions and more, keep reading!
Capital Gains Tax is a regular income tax that is assessed on the profit made from the sale of certain assets such as real estate, stocks and bonds. The United States government uses capital gains taxes to generate revenue by taxing people when they sell their possessions for more than they purchased them. Capital gains taxes are separate from sales taxes and do not represent an added cost, but are used to increase the overall tax revenue in the country.
However, if an item that was purchased at a lower price is sold at a higher price, then there are “capital gains” in addition to the profits made in the sale. This might occur when purchasing stocks in companies or it may be realized when selling off personal property such as a car, house or boat. The amount of tax that must be paid for this is determined by the value of the asset and the length of time it was held before being sold off.
In addition to taxing assets at their sale price, there are also taxes on capital gains from investments from which a profit has been made from the sale. Taxes are assessed when the purchase price of an investment is subtracted from its sale price.
The United States government allows deductions to be taken for items that have been sold at a loss in order to lessen the overall taxation amount due on capital gains. This can be used when selling assets that have decreased in value since they were purchased, or when the financial situation of the seller has declined since they purchased it.
The Difference Between Capital Gains Taxes and Income Taxes
It may seem as though capital gains taxes go hand in hand with income taxes. After all, they’re both a sort of tax that you have to pay on your earned money, right? The truth is that they’re actually very different.
When you pay income taxes , you’re paying the government for the right to earn money in your country. Basically, if you earn an income within a year, then this equals out to be the amount of money the federal government expects from you at tax time. If you make $5,000 during a year but only end up paying $3,000 in taxes (due to deductions , etc.) then you only need to pay the government the difference between your total income and your total tax bill.
If you have capital gains taxes though, you’re not just having to shell out money for your taxes . You’re actually paying the government a certain percentage of all of your earnings. This means that when you sell any sort of investment (stocks, bonds, mutual funds, etc.), the government expects a portion of the gains in your total holdings.
How Much Do I Need to Pay in Capital Gains Taxes?
Here’s the big question right here: How much money will I need to pay in capital gains taxes ? Unfortunately, this isn’t a math problem that can easily be done on the spot. The amount of capital gains tax you need to pay depends on your total income and your filing status .
This means that you’ll have to file either as single , married (joint), head of household , or qualifying widow(er) in order to find out how much you owe in capital gains taxes. You can do this on the official IRS website .
There are some other factors involved with figuring out how much you have to pay in capital gains tax too, which include:
What Tax Rate Applies to My Capital Gains ?
Besides your filing status, another factor that goes into figuring out how much you have to pay in capital gains tax is the type of investment you sold. This includes knowing which tax rate applies to your best-performing investments .
Long-term vs. Short-term Gains
One important thing to keep in mind regarding long-term and short-term gains : they are taxed differently! If you hold on to an investment for one year or less, then it’s considered a short-term gain and taxed at the same rate as your ordinary income (income tax).
On the other hand, if you hold on to an investment for one year or more, then it becomes a long-term gain and is taxed at a lower rate than your current income tax. This means that your income tax rate will be between 0%-20% depending on how much money you make per year!
Health Savings Accounts – Special Tax Treatment for Capital Gains Income
Another important thing to note is the special treatment given to capital gains from Health Savings Accounts (HSA). Since HSA contributions are made with pre-tax money, you don’t pay income tax on the gains when you withdraw them later in life. This is because they were taxed before.
What Kinds of Investments Generate Taxable Gains ?
Now that you know how much capital gains tax you need to pay, let’s talk about what kinds of investments can be taxed ! The following are some examples of what can be taxed during a given tax year:
Selling any kind of investment. This includes stocks , bonds , treasury notes, mutual funds , and more! It’s worth noting that the government doesn’t punish you for buying and selling within a single tax year – just when you sell your investments .
If you’re a landlord and you sell rental property. The government expects a percentage of the gains in your total holdings, regardless of how often you rent out your property (if at all).
Sale of business assets such as equipment, furniture, or tools that are specifically for use in your place of work . Basically, if you use this tool to help fetch money , then you can be taxed on the gains from its sale!
It’s also worth noting that many other types of assets are subject to capital gains taxes . These include inheritances, art collections , life insurance payouts, and personal property. However, each of these falls under a different set of tax rules so it’s best to learn more about them!
Now that you know everything there is to know about capital gains taxes , don’t let it intimidate you. It’s likely that your well-performing investments will be taxed at a lower rate than your current income tax, so take the time to do your research!
If you want to learn more or keep track of how much money you owe in capital gains tax, it’s best to use a good spreadsheet and/or accounting software. This will help you keep track of your taxable income and capital gains so you don’t get hit with penalties or lose out on money!
Finally, make sure you are familiar with all the different types of assets that are subject to capital gains taxes . The more you know about how the government operates, the more you can plan ahead and keep your money safe.