Capital gains are the proceeds you receive from the sale of a capital asset. The definition of a capital asset varies, but includes things such as collectibles, stocks, bonds, dividends and real estate. The IRS taxes gains on capital assets differently depending on the type of asset that was sold; the main determining factor is how long the asset was held. How you are taxed also depends on your filing status, as well as the amount of income you earned for the year.
Short-Term vs Long-Term Capital Gains
For tax purposes, the IRS classifies any capital gains on the sale of capital assets as either long-term or short-term gains. The difference between the two is determined by how long you held onto the asset before selling it. Short-term capital gains are gains you realized from the sale of a capital asset you’ve held onto for less than a year before selling it. In this case, the IRS will tax these capital gains at your regular income tax rate. Depending upon your tax bracket, you could find yourself paying a higher rate on part of your income up to the 2017 maximum tax rate of 39.6 percent. Also, if your income exceeds a certain threshold, you will have to pay an additional 3.8 percent Medicare surtax on both long and short-term capital gains as part of the Affordable Care Act.
On the other hand, long-term capital gains are proceeds from the sale of a capital asset that you held onto for more than a year, and the IRS taxes these gains much more favorably. For the 2017 tax year, taxes on long-term capital gains are generally 0, 15, or 20 percent. But, if you are in the two lowest tax brackets, you could be taxed at 0 percent and escape capital gains taxes all together. It is worth noting that not all long-term capital gains are taxed equally. Depending upon the type of capital asset, you could be taxed at different rates on the profit.
Capital Gains that Are Taxed Differently
Certain long-term capital gains are taxed at different rates. Proceeds from the sale of real-estate held for longer than a year, and that you depreciated on your taxes, is subject to a 25 percent capital gains tax unless you find yourself in the 10 or 15 percent bracket, at which point you have zero capital gains tax. The long-term capital gains you receive from the sale of collectible items such as antiques, card collections, stamps and coins, are taxed at 28 percent unless you’re in the 10, 15, or 25 percent tax brackets. Taxpayers in these brackets can expect to pay their standard tax rate on the capital gains from the sale of collectibles.
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Recent Tax Law Changes
Most of the tax law changes that went into effect December 20, 2017 are not retroactive, and therefore do not impact 2017 taxes that you will file in 2018. For purposes of capital gains taxes, nothing has changed that will have bearing on your 2017 tax return. The definition of short and long-term gains has remained the same, as have the long-term capital gains tax rate, and the 3.8 percent Medicare surtax. However, watch out for big changes in this area for your 2018 taxes (to be filed in 2019).
- TurboTax: Guide to Short-term vs Long-term Capital Gains Taxes (Brokerage Accounts, etc.)
- TurboTax: Capital Gains and Losses
- IRS: Capital Gains and Losses – 10 Helpful Facts to Know
- IRS: Topic No. 409 Capital Gains and Losses
- CnnMoney: 34 things you need to know about the incoming tax law
- TheMotleyFool: Your Guide to Capital Gains Taxes in 2018