When you sell a personal asset or an asset held as an investment, you'll incur a capital gain or loss. Like other parts of the tax code, the rules for capital gains can be complex. As a rule of thumb, expect to pay ordinary tax rates on short-term capital gains and lower tax rates on long-term capital gains.
Property that triggers a capital gain or loss is referred to as a capital asset. Capital assets include:
- Stocks and bonds
- Household furnishings
- Vehicles such as trucks, cars and motorcycles
- Real estate (although a portion of the gain from the sale of a personal residence can be excluded from income).
- Collectibles like coins, stamps or baseball cards
- Precious objects like gems, jewelry, gold and silver
Assets used in your trade or business and copyrights aren't considered capital assets.
Calculating the Capital Gain
Your capital gain is the excess of the cash received for the asset over your basis in the asset. Your asset's basis is the cost you paid to procure it. For example, your basis in a stock would be the price of the stock plus any other fees and commissions you paid for that stock. If you paid $20 for stock and sold it for $30, you have a $10 capital gain.
For certain types of property -- mainly real estate and vehicles -- you may need to calculate an adjusted basis. Your adjusted basis is your basis plus the cost of any improvements minus any tax depreciation you've claimed. For example, your adjusted basis in a rental property would be the cost of the property plus any improvements or additions -- like building a guest unit or installing a pool -- that you made less any depreciation expense you wrote off.
If you inherited an asset or received it as a gift, you may inherit the original purchaser's basis in the property. The rules are complicated, so work with a tax accountant to determine your basis.
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Capital Gain Tax Rates
If you held the asset for less than a year before selling it, you have a short-term capital gain. Like salaries and self-employment income, short-term capital gains are taxed at your ordinary income tax rate. At the time of publication, this can be as high as 39.6 percent.
If you hold the asset for more than a year, you have a long-term capital gain. For example, if you purchase a stock on Jan. 1, 2015, and sell it on Jan. 2, 2016, you have a long-term gain. Long-term capital gains are taxed at lower rates. The highest you'll pay for 2015 is 20 percent, and some taxpayers don't have to pay any tax on capital gains.
The capital gains on certain assets -- specifically, qualified small business stock, collectibles and the depreciated portion of property -- are taxed differently. If you have a gain from one of these assets, work with an accountant to determine your tax rate.