The government collects tax on any profit — or capital — made from selling assets.
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In addition to the taxes it collects on yearly salaries, the government collects capital gains taxes on any money that's earned from assets the taxpayer may own. There are both federal and state capital gains taxes. The Internal Revenue Service considers pretty much everything someone owns a capital asset, from personal items such as houses and cars to investments like stocks and bonds.
The capital gain of an item is determined when it is sold. If the price it sells for is greater than what is was purchased for, there is a capital gain. If the selling price is lower than the purchase price, there is a capital loss. Individuals and businesses pay taxes only when they see capital gains, and the taxes are only paid when the assets are actually collected. Even though the value or a stock or bond may increase, taxes are only paid when they are sold and the individual or business actually sees the profit.
Capital gains taxes are not paid on capital losses. Taxpayers can deduct capital losses, but only on those loses that come from investments. Capital losses from personal items may not be deducted. While taxpayers can only deduct up to $3,000 a year in capital losses, they can carry over any amount beyond that to future years.
Calculating capital gains tax
Both individuals and businesses are required to pay taxes on all capital gains. There is not a single federal or state tax rate that is paid on capital gains. Instead, the tax rate is determined by several factors, including how much money the taxpayer earns during the year and how long the capital asset had been held for.
The IRS classifies capital gains and losses as short- and long-term. Short-term capital gains come from assets that have been owned for less than a year. Those that are held longer than 12 months are considered long-term. There are no special tax rates for short-term capital gains. They are taxed at the exact same rate as regular income is. Assets that are owned for longer than a year are subject to a reduced tax rate. However, long-term capital gains are taxed at different rates for each taxpayer based on how much money they earn each year.
In 2013, George W. Bush-era tax cuts expired and capital gains taxes were increased for many taxpayers. Currently, taxpayers in the lowest tax bracket — individuals who earn less than $36,000 and married couples that make less than $72,500 — are not required to pay federal capital gains taxes. Single taxpayers who make between $36,000 and $400,000 and married couples that earn between $72,500 and $450,000 must pay a 15 percent capital gains tax. Those earning more than $400,000 on their own or $450,000 with their spouse are subject to a 20 percent capital gains tax.
There are several exceptions, however. There is a 28 percent tax rate on capital gains from certain qualified small business stock, as well as from selling collectibles, such as coins or art. In addition, taxpayers may be subject to a 28 percent capital gains tax on un-recaptured gains from the selling of some types of property.
While federal tax rate structure is standard for everyone, each state has its own capital gains tax rates and structures. Currently, Hawaii, California, Oregon, Vermont and New Jersey have the highest state capital gains taxes, while nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — have no state capital gains tax.
Paying capital gains taxes
Capital gains taxes are paid yearly when taxpayers file their federal and state income taxes. Capital gains and deductible capital losses are reported on two different IRS forms: Form 1040, Schedule D; and Form 8949. They both can be downloaded online directly from the IRS website.