The capital gains tax is a government fee on the profit made from selling certain types of assets. These include stock investments or real estate property. A capital gain is calculated as the total sale price minus the original cost of an asset.
A capital loss occurs when you sell an asset for less than the original price. Some capital losses can be used to offset capital gains on your tax return, which lower the taxes you pay.
The capital gains tax only becomes due once you sell your investment. For example, you won’t owe tax while stock gains value inside your portfolio. However, once you sell your shares, the profit must be reported on your tax return. As a result, you pay a tax on your profit at the capital gains rate.
Short-Term vs. Long-Term Capital Gains
The federal government taxes all capital gains. Short-term capital gains or losses occur when you’ve owned an asset for a year or less. Long-term capital gains or losses occur if you sell an asset after owning it for longer than one year.
Short-term capital gains have a higher tax rate than long-term capital gains.1 This difference is deliberate to discourage short-term trading. Trading stocks and other assets frequently can increase market volatility and risk. It also costs more in transaction fees to individual investors.
Standard Tax Rates
There are two standard capital tax rates for long- and short-term investments:
- Short-term capital gains tax rate: All short-term capital gains are taxed at your regular income tax rate. From a tax perspective, it usually makes sense to hold onto investments for more than a year.
- Long-term capital gains tax rate: The tax rate paid on most capital gains depends on the income tax bracket. Those in the 10% and 12% income tax brackets generally pay zero capital gains tax…………Read More>>