It’s important for all taxpayers to understand what information must be reported to the IRS for tax purposes. This includes any gain or loss from the sale of capital assets. A capital asset is considered anything owned by an individual for investment or personal purposes.
As a general rule, capital assets include property and investments which are not easily liquidated for cash. Real estate, equipment and other assets which contribute to business operations or personal use are considered capital assets; the sale of which must be reported on income tax returns.
What is a Capital Gain?
Capital assets include almost anything owned for the purpose of investment, pleasure or personal use. When a capital asset is sold, a capital gain or loss occurs. If the amount a capital asset is sold is higher than the original purchase price, the difference is a capital gain, or profit. Conversely, when the amount a capital asset is sold is less than the original purchase price, the difference is considered a loss.
How to Report Capital Gains
Capital gains must be reported on your federal income tax return. Capital gains are subject to tax, the rate of which is determined by the length of time the asset was held. To report capital gains on your income tax return, use Schedule D, Capital Gains and Losses. Transfer information from the Schedule D to Form 1040, Line 13. Capital losses from investment property may be deducted.
Capital Gains Classifications
Capital gains are classified by the amount of time you held the asset. Capital gains from assets held more than one year are classified as long-term. Capital gains from property held one year or less are classified as short-term. Long- and short-term classification of capital gains are important as it impacts rate at which they are taxed.
Short-Term Capital Gains Tax Rates
Federal capital gains tax rates for short-term capital gains are usually the same rate applied to ordinary income reported the same year. This can range anywhere from 10% up to 39.6%.
Long-Term Capital Gains Tax Rates
Federal capital gains tax rates for long-term capital gains are usually lower than tax rates applied to ordinary income reported the same year. The special long-term capital gains rate is determined by the ordinary income tax bracket under which you fall. Tax rates for filers in the 10% or 15% tax brackets (including capital gain income) would be 0%. Income totals including capital gain income in the 25% or higher tax bracket will have gains taxed at 15%.
Capital Gains Rates for 2010, 2011, 2012 & 2013
Tax Years 2010-2012 | ||
| Income Tax Rate | Short-Term Capital Gains Tax Rate | Long-Term Capital Gains Tax Rate |
| 10% | 10% | 0% |
| 15% | 15% | 0% |
| 25% | 25% | 15% |
| 28% | 28% | 15% |
| 33% | 33% | 15% |
| 35% | 35% | 15% |
Tax Years 2013- | ||
| Income Tax Rate | Short-Term Capital Gains Tax Rate | Long-Term Capital Gains Tax Rate |
| 10% | 10% | 0% |
| 15% | 15% | 0% |
| 25% | 25% | 15% |
| 28% | 28% | 15% |
| 33% | 33% | 15% |
| 35% | 35% | 15%* |
| 39.6% | 39.6% | 20%* |
*There is also an additional 3.8% surtax on investment income if your adjusted gross income is more than 200k (individuals) and 250k (married filing jointly) with obamacare in 2013
Capital gains and losses are reported in the year the sale of the asset occurred. Capital losses may reduce taxable income up to $3,000 annually. If capital losses exceed the allowable deductible amount for the year, they can be carried over to the next year.
Is there a chart that shows the current state capital gains rates?
Hey Greg,How are you? I think you should be able to find your answer at your state’s web pages. Look for: Dept of Finance; Income Tax; Dept. or Revenue; etc. Hope this helps.
When to report and pay taxes on 2012 long term capital gain
Thats good info. I heard long term capital gains tax on say 28% bracket jumps to 35% in 2013. So look like the obama admin looking for another 5% from pep in this bracket. What happen to just raising taxes on people making more then 250k? can’t believe pep put him in for a second term.
Like someone said, it could possibly be 35% depending on if congress does anything to extend the bush tax cuts. Can’t say this admin has helped us out ONCE. None of the Obama plans have helped and we do not make over 100k.
Why do people who get their income from buying and selling stock in existing corporations pay a lower tax rate than I do on my earned income? They aren’t putting money in new businesses, to addd jobs. Investors that invest in stock on the market in existing corporations are simply investing in future earnings of existing businesses.
You are right about investors are investing in the future earnings of existing businesses but what you do not understand is the volatility of what the shares are to a business. The company operates hopefully on a basis it makes more than it uses. In some cases the corporation sells its own shares to the market to increase the Free Cash Flow to, to (hopefully) run a more efficient company by investing in more manual labour or fixed assets. People who invest from buying and selling stocks are RISKING their money in hopes of making more. By making an earned income, although nothing is wrong with it, it is safer for an individual. Our economy is driven by investing/spending. You can spend to stimulate the economy directly or you can invest to stimulate the economy in the long run. Saving does not do anything for the individual or the economy.
PS. ANYONE can trade stocks, including this college student who has little capital to start off. You may want to look into investing, it’s definitely fun and a good way to make money for both you and the government (via taxation).
Cito. You are correct. One mistake you make is how savings does nothing for the economy. You are wrong here. Savings is where investment comes from. Without savings, there is no investment. Savings is often the result of self-sacrifice. It is investment that improves the overall standard of living for a country. If all we had to do was spend, then every socialist country in the world would be prosperous. However, it is not spending that improves the standard of living first, it is investment which comes from savings. This is contrary to the general belief taught in many schools that demand creates supply. It doesn’t. Keynes was wrong. Supply creates demand. If you take money out of the equation, it becomes easier to see. If you are a baker, and I am a candle stick maker, in order for me to obtain bread I have to produce candles.
But in order for the baker to make him bread, the candle maker must want it thus creating the demand first. Right? Restaurant buffets go out of business all the time because they are constantly putting out food. If the amount of diners decreases, then this excess supply goes to waste, food costs go up, and the business closes.
In most cases they don’t. Warren Buffet doesn’t pay less than his secretary. He may only pay 15% on capital gains on the personal level but since he owns 1/3 of BH, he is paying the corporate tax as well. If the corporate tax wasn’t there, the value of his company and EPS would be much higher. So really he is not paying less than his secretary.
There are many reasons that capital gain rates are lower. One is, that this money has already been taxed once when it was received as earned income. The second, is there is a big risk with investing. Unlike your job, if you know you earn $10 an hour and work for 10 hours, you expect to receive $100. With investing, there is no guarantee that your $100 will increase or go to zero. Also with earned income, you are taxed at current rates, so inflation does not directly affect your income. With capital gains, lets assume you invest $1000 and there is 10% inflation. If you sell 1 year later and your account is worth $1100, in real income terms, you have broken even, but according to the government you made(10%) or $100, and have to pay tax on that gain. So in real terms you have lost buying power. To address your exact question, AMT has a lot to do with. If someone gets paid in stock, they often are paid based on options. If an executive has an option to buy a stock at $10 a share and its value is $100, that individual must make an AMT adjustment of $90 per share immediatly, meaning there is a large chance that they will be paying AMT on some of that income. If they sell the stock immediatly, they will avoid tme AMT, but teh cpaital gains will not be short term and taxed at Ordinary Income rates instead. During the internet boom in the late 90’s, a lot of executives took options like this and after the companies bottomed out a lot of them were left with large tax bills due to AMT, causing them to go bankrupt and lose their house, car, everything. In short, there is risks with capital gains and the lower rate accounts for this risk.
All of these rates remain very low based on historical rates. With the current liability problem the US is carrying, we need both across the board increases to cap. gains, along with massive government spending cuts.
40% tax rate???? That’s absurd!
My 85 year old mother-in -law recently sold a vacant house that has been sitting vacant for 7+ years. She owns another home that is her primary residence. She bought the house in @ 1944 for $6500 and sold the home for $155,000. She has of course remodeled a couple of times with additions and has recentlypent @ 20K on updates for selling the home. We are putting together a log for the updates, but the amount of time may make this a difficult job. She has not filed taxes in the past 10 years because her income was so low. What are the tax implications to her after this sale?
Question, What if you received an equity advance from your employer as part of a relocation? We received advance in Dec. but sold our home in Jan 2014. On our W-2 the equity advance is show as income. Not sure on how to manuver through this?
My mother has had a property since 1977 and bought the house for about 77,000. She sold the house this year for about 225,000.00. She gave all the money for this divided equally to her children. Do you know how to go about putting this on the schedule D and 8849 form?
I sold a car in 2013 made $24000 I know there is no capital gain but do I owe regular income tax on this. I’m in the 15% tax bracket.