When you sell real estate, stocks, or other taxable assets, for a higher amount than when you acquired them, that’s a capital gain. Your capital gain is the sale price minus the cost of your asset. That’s taxable and is called capital gains tax.
Once you sell your taxable assets, your capital gains tax becomes due. Your investment can keep on gaining value, like your stocks. But once you sell your shares, you need to include this in your tax return and pay a tax on your profit.
All capital gains are taxed by the federal government. If you owned a particular asset for a year or less, that’s a short-term capital gain. If you sell an asset after owning it for more than a year, that’s long-term capital gain.
Short-term capital gains hurt the market, so they are taxed higher than long-term capital gains. Trading frequently can make the market unpredictable and risky. Also, since every sale has transaction fees, it becomes more costly for investors. Short-term capital gains are taxed the same as your regular income tax.
In contrast, long-term capital gains are taxed based on fixed brackets, adjusted each year for inflation.
Here’s a simplified way to compute your capital gains tax:
- Segregate. Your long-term and short-term capital gains need to be separated. This is because they are taxed differently.
- Once that’s done, make sure to factor in your losses and subtract them from your gains. Both for short-term and long-term capital gains.
- Utilize tax software or speak with your PWCPA PC tax expert to understand your tax liability.
There are ways to reduce your capital gains tax liability:
- Always claim your losses on your assets. You can sell losing assets before the year ends to cut your taxes.
- Your retirement is an advantage. If you wait until you retire to sell your assets, you may end up paying very little to zero capital gains tax.
- Your IRA and your 401k are nontaxable, so are other retirement plans. Maximize this if you can.
- Wait until you've held assets for more than a year, lowering your capital gains tax.
- Charitable donations can offset your taxes. Give and you shall receive.
To maximize your investment, collaborate with the tax experts at Peter Witts CPA PC who can provide valuable insights on capital gains tax.
I’m Kristin, the PWCPA PC Customer Success Specialist. For more information about this topic, or any other, you can always reach me through our customer ticketing system.
