Capital gains taxes are the taxes you pay on profits from most investments including stocks, bonds, mutual funds and any other property that acquires value over time.
Duration of the Investment
The IRS has established two investment types: short-term and long-term. Investment duration is calculated from the day of purchase to the day of sale. Investments held over a year are considered long-term, while investments held under a year are considered short-term.
Capital Gains Tax Rates
You only owe capital gains tax when you sell investments at a profit and realize your gains. For short-term capital gains taxes, you are taxed at your ordinary income tax rate.
Long-term capital gains are taxed at either 0%, 15%, or 20%, depending on your income and filing status.
What Isn’t Affected by Capital Gains?
Certain types of property and accounts are not affected by capital gains taxes. There are two general property types unaffected by capital gains. The first is business property, including products. The second is anything you create as an individual. This could be a book you wrote or an invention you patent.
Additionally, certain retirement and education accounts are not subject to capital gains taxes.
Offsetting Capital Gains
Investments may not always pay off. Sometimes a market change results in your property reducing in value. This reduction is also calculated on your taxes and is calculated into your capital gains taxes. This can lower your taxable income range.
For example, if you receive $90,000 in profit from selling one investment, but lose $15,000 on another investment, this would drop your total income from investments to $75,000, which could place you in a different tax bracket, depending on your filing status. These reductions and gains can only be combined if they are the same type of investment, long-term or short-term and are sold in the same year.
Capital gains taxes can be postponed by using the income to invest in a similar property type. However, make sure to consult the IRS website or your tax professional before moving forward on any like-kind exchange, as the requirements and investment types have changed over the years.
If you have questions about different strategies to protect your investments from higher tax rates, please reach out to our team and allow us to help.