Buying assets that have the potential go up in value is a common way investors attempt to increase their wealth. When you sell something at a price that is more than the amount you paid for it, the difference between the sale price and the original purchase price is a capital gain. The federal government taxes capital gains, but investment gains are subject to different rules and tax rates than ordinary income.
Some investors buy and sell assets like stocks and bonds frequently in an attempt to make quick profits. If you hold an investment a year or less before selling it, any profit you make on the sale is considered a short-term capital gain. Short-term gains are taxed at your normal income tax rate, which depends on your total annual income. In 2013, ordinary income can be taxed at rates as high as 39.6 percent.
Investors looking to minimize risk and save money for retirement often hold onto assets for many years before selling them off. If you hold an investment longer than a year, any gains you make when selling the investment are taxed at a long-term capital gains rate. If your annual income is over $400,000 as a single taxpayer or $450,000 as a joint filer, you pay a 20 percent tax rate on long-term gains. If your normal income tax rate is 25, 28, 33, or 35 percent, your long-term capital gains rate is 15 percent. You generally don't pay tax on long-term gains if your normal income tax rate is 15 percent or less. An exception arises in the case of collectible items like jewelry, gems, art and coins: Long-term gains on collectibles are taxed at a rate equal to your normal income tax rate or 28 percent, whichever is lower.
Medicare Investment Tax
Starting in 2013, a "net investment income tax" of 3.8 percent applies to capital gains and other investment income made by certain high-income individuals. The additional tax is designed to raise revenue for the Medicare program to pay for new health care laws associated with the Patient Protection and Affordable Care Act. The NIIT applies to single taxpayers with an adjusted gross income over $200,000 and joint filers who make more than $250,000.
Selling a Home
Selling your home can result in a substantial capital gain if the value of real estate increased in your area since you bought it. The government lets you exclude $250,000 of gains on the sale of your main home if you lived in and owned the home for two of the previous five years. The exclusion is $500,000 for married couples filing joint returns. If your capital gains exceed the exclusion limit, the excess is subject to capital gains tax.
- Internal Revenue Service: Topic 409 - Capital Gains and Losses
- The Wall Street Journal: How Much Will Your Taxes Jump?
- Internal Revenue Service: Net Investment Income Tax FAQs
- Congressional Health Care Caucus: New 3.8% Medicare Tax on "Unearned" Net Investment Income
- Internal Revenue Service: Sales and Trades of Investment Property
- Internal Revenue Service: Publication 523 - Main Content
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.