For many investors, capital gains tax is among the more confusing financial topics. Yet a basic understanding of capital gains is key to building a financial plan that reflects your goals and needs. It’s important to be aware of the tax consequences of selling your personal assets, as doing so may significantly affect your tax return—and your financial picture as a whole.
What is a capital asset?
Almost anything you own for personal or investment purposes may be considered a capital asset. This applies to a range of assets, including investment vehicles such as stocks and bonds, real estate, and collectibles. Capital gains resulting from the sale of these assets may be subject to capital gains tax.
What is a capital gain?
When a capital asset is sold, the difference between the adjusted purchase price (basis) of the asset and the amount for which it is sold is a capital gain or a capital loss. You incur a capital gain if you sell the asset for more than its basis. A capital gain is classified as short-term if you held the asset for one year or less before selling it; it is considered long-term if you held the asset for more than one year.
How are capital gains taxed?
Short-term capital gains are taxed at ordinary income tax rates, but long-term capital gains are taxed at lower rates. The Tax Cuts and Jobs Act of 2017 retained the existing long-term capital gains rates of 0 percent, 15 percent, and 20 percent. The rate at which you are taxed will depend on your taxable income:
- 0 percent: Applies to individuals with taxable income of no more than $39,375 ($78,750 for married couples filing jointly)
- 15 percent: Applies to individuals with taxable income between $39,375 and $434,550 (between $78,750 and $488,850 for married couples filing jointly)
- 20 percent: Applies to individuals with taxable income greater than $434,550 (greater than $488,850 for married couples filing jointly)
Please note: An additional 3.8-percent Medicare contribution tax on unearned income applies to taxpayers with modified adjusted gross income (MAGI) above a $200,000 threshold ($250,000 for married filing jointly, $125,000 for married filing separately). The tax applies to net investment income, which includes capital gains and qualified dividends, or the amount by which the taxpayer’s MAGI exceeds the threshold, whichever is less.
Special tax considerations
Keep in mind that different types of capital gains are taxed at different rates, typically depending on the asset class for which the gain was incurred:
- Collectibles. Long-term gains on collectibles are taxed at a maximum 28-percent rate, and short-term gains on collectibles are taxed as ordinary income. Items such as coins, stamps, gems, antiques, and fine art are considered collectibles.
- Real estate. Special exceptions apply to capital gains on real estate. If you are thinking about selling your primary home, you may qualify for a tax exclusion if you meet certain criteria. If you hold rental property for more than one year, the gain attributable to depreciation is generally taxed at a maximum of 25 percent.
- Business assets. Gains on fixed assets that are used for your business, such as furniture and machinery, are taxed as ordinary income.
Your tax planning
Remember, your capital gains tax rate depends on a variety of factors, including your income level, when you bought and sold the asset, and changes to the tax code. We can assist you and your tax advisor in creating and implementing a comprehensive tax plan that is consistent with your financial goals and personal situation.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
Michael Flaherty is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org
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