When you sell personal or investment property at a gain, you'll report a capital gain on your taxes. The tax rate you pay on your capital gain depends on the type of property you sold and when you sold it. You can also net capital losses against capital gains to reduce your overall tax liability.
Short-Term and Long-Term Capital Gain Rules
Tax rates on short-term and long-term capital gains differ substantially. If you owned the asset for less than one year before you sold it, the gain is short-term. If you held it for a year or more, it's a long-term gain. As a general rule, you'll pay ordinary tax rates on short-term capital gains. For 2015, that could be zero percent, 10, 15, 25, 28, 33, 35 or 39.6 percent of the gain. Long-term gains, on the other hand, are taxed at more favorable, lower rates. As of 2015, taxpayers in the 39.6 percent bracket pay 20 percent, taxpayers in the 10 percent to 15 percent bracket pay zero percent and everyone else pays 15 percent.
Example of Taxes Short-Term and Long-Term Gains
Suppose you had $2,000 worth of capital gains and you're in the 25 percent tax bracket. If you held all those assets for less than a year, you would owe $500 in taxes ($2,000 multiplied by 25 percent). If you had held the assets for more than a year, you would only pay $2,000 multiplied by 15 percent -- or $300 -- which is a $200 tax savings.
Exceptions to the Short-Term and Long-Term Rules
There are a few notable exceptions to the short-term and long-term tax rule. Section 1202 of the tax code allows taxpayers to exclude some of the gain on the sale of qualifying small business stock. Gains from selling collectibles such as art, coins or baseball cards are taxed at 28 percent. If you sell depreciated real estate, part of the gain is taxed at ordinary tax rates rather than capital gain rates.
Netting Short-Term and Long-Term Gains and Losses
If you also have capital losses, you can net them against your gains to reduce your tax liability. Short-term losses are first netted against short-term gains. If short-term losses exceed gains, you can then net them against long-term gains.
Example of the Netting Process
Say you have $3,000 in short-term losses, $1,000 in short-term gains, $5,000 in long-term gains and no long-term losses. Since your short-term losses exceed short-term gains by $2,000, you can subtract your net short-term loss of $2,000 to reduce your long-term gain of $5,000. On your taxes, you would report no short-term gains or losses and a long-term capital gain of $3,000 ($5,000 less $2,000).
The maximum net capital loss you take is $3,000 a year. Any excess must be carried over to the next tax year.