How to Understand Capital Gains Tax
Start at square one., Decide if capital gains taxes even apply to you., Take your losses into account., Determine which tax bracket you fall into.
Step-by-Step Guide
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Step 1: Start at square one.
A capital gains tax is a tax on the profits from the sale of an asset.
The asset could be virtually anything, such as a home, a piece of land, stocks, bonds, collectibles—even an intangible asset, like a trademark or a patent.In this sense, capital just means money, and gains mean profit.
Most people’s income comes from wages, and that’s mostly what ordinary income tax covers.
So think of income tax as a tax on wages, and capital gains tax as a tax on selling things. -
Step 2: Decide if capital gains taxes even apply to you.
If you derive all or most of your income from wages—a paycheck from an employer—then capital gains taxes probably don’t apply to you at all, because most people who derive most of their income from wages don't make enough money from the sale of assets for the capital gains tax to kick in.
Also, there are a couple forms of income which are definitely derived from the sale of assets, but for one reason or another aren’t subject to the capital gains tax.Short term capital gains, or capital gains on assets held less than a year, are always subject to ordinary income tax rates.
For example, a day trader who buys stocks and quickly resells them is subject to the ordinary income tax rate, as is an heir who immediately sells a piece of property they inherited.
If the profits from the sale of your asset are less than $37,650 (or $75,300 for a married filer) AND the asset sold is something other than a collectible or small business stock, you pay no tax at all.
Collectibles are items that people collect and sell, like a comic books or Beanie Babies. , If you have made more from the sale of an asset than the minimums described above, you’ll need to factor in your capital losses in order to get a clear picture of your capital gains.Calculating the net gain or loss is easy.
You simply take your losses and subtract them from your gains.
If you’ve lost more than you’ve gained, you won’t be subject to any tax.
As long as the loss didn’t stem from the sale of personal property, like your residence, you can deduct up to $3000 per year from your personal income, and carry over additional losses into the following years.
Say you had a net loss of $9,000 for
2016.
You can deduct $3,000 from your income in 2016, another $3,000 in 2017, and another $3,000 in 2018--even if you had net gains in 2017 and
2018. , If you’ve still made more than the minimum after calculating your net gain, you need to decide which tax bracket you’ll fall into.
You can take a look at the various tax brackets for single and married filers at http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New.
The tax rate for collectibles is different than the tax rate for conventional capital gains.
Capital gains from collectible are taxed at the same rate as income from wages, with a cap of 28% (instead of 39% for wage income). -
Step 3: Take your losses into account.
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Step 4: Determine which tax bracket you fall into.
Detailed Guide
A capital gains tax is a tax on the profits from the sale of an asset.
The asset could be virtually anything, such as a home, a piece of land, stocks, bonds, collectibles—even an intangible asset, like a trademark or a patent.In this sense, capital just means money, and gains mean profit.
Most people’s income comes from wages, and that’s mostly what ordinary income tax covers.
So think of income tax as a tax on wages, and capital gains tax as a tax on selling things.
If you derive all or most of your income from wages—a paycheck from an employer—then capital gains taxes probably don’t apply to you at all, because most people who derive most of their income from wages don't make enough money from the sale of assets for the capital gains tax to kick in.
Also, there are a couple forms of income which are definitely derived from the sale of assets, but for one reason or another aren’t subject to the capital gains tax.Short term capital gains, or capital gains on assets held less than a year, are always subject to ordinary income tax rates.
For example, a day trader who buys stocks and quickly resells them is subject to the ordinary income tax rate, as is an heir who immediately sells a piece of property they inherited.
If the profits from the sale of your asset are less than $37,650 (or $75,300 for a married filer) AND the asset sold is something other than a collectible or small business stock, you pay no tax at all.
Collectibles are items that people collect and sell, like a comic books or Beanie Babies. , If you have made more from the sale of an asset than the minimums described above, you’ll need to factor in your capital losses in order to get a clear picture of your capital gains.Calculating the net gain or loss is easy.
You simply take your losses and subtract them from your gains.
If you’ve lost more than you’ve gained, you won’t be subject to any tax.
As long as the loss didn’t stem from the sale of personal property, like your residence, you can deduct up to $3000 per year from your personal income, and carry over additional losses into the following years.
Say you had a net loss of $9,000 for
2016.
You can deduct $3,000 from your income in 2016, another $3,000 in 2017, and another $3,000 in 2018--even if you had net gains in 2017 and
2018. , If you’ve still made more than the minimum after calculating your net gain, you need to decide which tax bracket you’ll fall into.
You can take a look at the various tax brackets for single and married filers at http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New.
The tax rate for collectibles is different than the tax rate for conventional capital gains.
Capital gains from collectible are taxed at the same rate as income from wages, with a cap of 28% (instead of 39% for wage income).
About the Author
Sara Sanchez
A seasoned expert in lifestyle and practical guides, Sara Sanchez combines 2 years of experience with a passion for teaching. Sara's guides are known for their clarity and practical value.
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