What are Capital Assets and the Capital Gains Tax

Capital assets are investments made in significant pieces of property. Capital gains tax is a charge against the profit from an investment that takes place once the investment is sold.

Capital assets could be stocks, bonds, cars, jewelry, coin collections, art collections, stamp collections, machinery, trademarks and patents, and real estate.

Current U.S. federal tax policy applies the capital gains tax rate (0%, 15%, or 20% depending on the taxpayer’s tax bracket) only to the sale of capital assets that have been held longer than a year—this is known as long-term capital gains. 

 Short-term capital gains – those that are held for less than a year, are taxed at the regular income tax rate of the individual.

When you invest in a mutual fund, the mutual fund owns the capital assets such as stocks or bonds. If the fund owns these assets for more than a year before selling them off, the sale of those assets are capital gains and when they pass those gains on to you as an investor, it is done in the form of a capital gain distribution. The IRS views this distribution as income that must be reported. No matter how long you have owned shares in the mutual fund, you will consider these capital gain distributions as long-term capital gains and report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses.

If you are not required to use Schedule D (Form 1040), you would report the amount on line 7 of Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and check the box.

The tax experts here at Peter Witts CPA PC are here to answer any questions you may have about long and short-term capital gains and losses, distributions, and how they affect you.

Kristin-w-background-2

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.