What is Capital Gains Tax?

Explaining capital gains tax is fairly simple but figuring out the amount of tax that must be paid can be much more complicated.

Capital gains tax is a tax for the profit of your capital gains. Capital gains are profits from the sale of bonds, stocks, some collectibles, and property. If you sold any of these capital assets and made a profit then you must pay a tax on that profit.

Short-Term

If you made a profit on the sale of your short term capital asset then you could be taxed up to 35%. Short term capital asset is defined as an asset that you owned for less than one year before it was sold.

Long-Term

If you made a profit on the sale of your long term capital asset then the tax due will be much lower than on your short term capital gains. Currently if you are in the 10-15% marginal tax bracket then you will have a tax rate of 0%. This is going to expire in the next couple of years and return to the previous tax rate of about 5%. If you are in the 25% or above marginal tax bracket then you will be taxed at the 15% rate on your capital gains.

So there are many things to consider if you are planning on selling your capital assets. You may want to hold on to them a little longer so you don’t end up paying a huge amount of capital gains tax. If you sold an asset and it created a loss then you can use this loss as a deduction against your other capital gains.

To learn more and calculate the amount of your capital gains tax, visit TurboTax Online.