Episode 44 Capital Gains Tax

Profits on investments can be taxed as regular income or at a lower long-term capital gains tax rate. Capital assets are things you buy, hold, and then sell, like stocks, bonds, mutual funds, Exchange Traded Funds (ETF), collectibles, and real estate property. Its increase in value is called gain. Capital gains are taxed when they are sold. You calculate gain by subtracting what you paid, called basis, from what you sell it for. To be long term you have to hold it for one year or more. If you buy a capital asset l, hold it for one year or more, then sell it for more than you paid for it, you have a long-term capital gain. You will owe tax on it, but the tax rate you pay will be lower than regular income tax.

Long term capital gains (LTCG) are taxed at 0%, 15%, and 20%. In 2020, if your total income was up to $40,000 if you’re single, or $80,000 MFJ your LTCG are taxed at 0%! Over that up to $400,000 plus you’re LTCG will be taxed at 15%. If you are expecting a drop in income that would put you in the 0% LTCG tax bracket, like taking some time off from work after transitioning out of the military, retiring early before you are eligible for a pension or social security, or are between jobs, this may be a good time to realize a LTCG. If you sell while you are in the 0% LTCG bracket, you pay no tax on it. You can reinvest it in something else and reset your basis, paying less tax overall than if you let that initial investment ride. Even if you won’t be in the 0% LTCG bracket, the LTCG rate is always lower than your federal income tax bracket, with a couple of exceptions that I’ll cover below.

Here are a few things that are NOT long-term capital gains. Regular dividends and interest from investments you own are taxed as regular income. If you sell an asset you held for less than one year, it is a short-term capital gain and will be also taxed at your higher regular income rate.

If you sell an asset for less than you paid for it, it is a capital loss. You can subtract your losses from your gains in the same year to determine your tax. If you have an overall gain, you pay tax on the difference. If you have an overall loss of, you can deduct up to $3,000 of it from your regular taxable income. The rest of your losses have to be “carried over” to the next year.

A special category is the sale of a your home. Up to $250,000 of gain if you are single, $500,000 of gain if married is not taxed if you lived in your home for 2 of the last 5 years before you sold it. Our military can have up to 10 years to meet the requirement if you PCS . And federal employees suspend the 5-year clock while they on government orders overseas . .

There’s not enough time today to go into the sale of a rental property which is also subject to LTCG tax. But know that improvements to the property are added to basis. And when sold you will pay a special 25% capital gains tax on all the depreciation deducted from your taxes over the years, called unrecaptured depreciation.

The last special rule is the LTCG rate for some assets are taxed at a flat 28% , no matter your income . This includes collectibles like art, stamps, coins, cards, comics, other rare items, and antiques, as well as precious metals in any form. If you are a high earner in the 32%, 35%, 37% income tax brackets, the LTCG tax rate of “just” 28% is still a good deal. But for most Americans, the 28% LTCG rate for this special category of assets is HIGHER than your regular income tax rate.

Lastly, keep detailed records of how much you pay for your assets. If you are buying and selling assets with a broker-dealer, bank, or mutual fund they will issue you a FORM 1099-B each year that will list the sales details and basis and you just plug that into your tax return

IRS Topic No. 409 Capital Gains and Losses https://www.irs.gov/taxtopics/tc409