Introduction
When you sell a personal or business asset for more than what you paid for it, the result is usually considered a capital gain and is taxable. Capital assets held for more than one year are taxed at special rates that are lower than that for ordinary income.
This video is a highly oversimplified view of what capital gains are and how they are taxed.
2022 UPDATE:
Capital Gains Rates MAGI thresholds for 2022:
0%: less than $41,675 (S), $83,350 (MFJ, QSS), $55,600 (HOH)
15%: $41,675 - $170,050 (S), $83,350 - $340,100 (MFJ, QSS), $55,800 - $170,050 (HOH)
20%: over $170,050 (S), $340,100 (MFJ, QSS), $170,050 (HOH)
To see how capital gains tax is calculated using the Qualified Dividends and Capital Gains Worksheet, click here: youtu.be/TzcuPJmfZDc
To learn more about calculating basis, click here: youtu.be/0-u26qgcZ8k
To learn more about capital losses and how they work, click here: youtu.be/P4SG6Wg4zV4
Additional information and resources:
"Instructions for Form 1040 and 1040SR" (this includes the Qualified Dividends and Capital Gains Worksheet). www.irs.gov/pub/irs-pdf/i1040.pdf
IRS Publication 550: "Investment Income and Expenses": www.irs.gov/pub/irs-pdf/p550.pdf
"2020-2021 Capital Gains Tax Rates--and How to Calculate your Bill" www.nerdwallet.com/article/taxes/capital-gains-tax-rates
The Tax Geek on Twitter: @taxgeekusa
The Tax Geek on Reddit: www.reddit.com/r/askataxgeek
All images other than those the producer of this video has created were sourced from Wikimedia Commons from the following users:
NatGeo Lover
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Intro and background music: "Bluesy Vibes" - Doug Maxwell - YouTube Audio Library
DISCLAIMER: This video is for educational and informational purposes only. It is not intended to render tax advice for individual situations. If you have questions regarding your particular tax situation, please check out the resources below, or consult with a qualified tax professional.
The information in this video is based on tax law and IRS regulations in place when this video was published.
Content
Hi, it's the tax gig again with more of your taxes oversimplified today, I'm going to answer the question: what is a capital gain and how are they taxed? The simplest answer is a capital gain is when you sell a capital asset for more than its basis, but that doesn't do us any good unless we know what a capital assets are and b what basis is.
So, let's look at those two concepts.
First, we'll define a capital asset to do that we'll have to define what an asset is.
First, an asset is anything that can be owned and has value assets come in two broad types, tangible and intangible: tangible assets are anything that exists that has intrinsic value.
Examples of this are land appliances, furniture, automobiles and everything else you can see or touch intangible assets are just the opposite.
These are assets that have no intrinsic value.
Instead, these assets only have value because we believe they do.
Examples of this are money, stocks, bonds, patents or copyrights, all property, whether tangible or intangible, can be held for one of three uses, personal use, which is ownership or use of an asset.
That is not connected to a business business use which are assets used in a business to generate revenue and investment use which are assets that are held in the hope that they will increase in value capital assets are all assets that are held for personal or investment use.
The following are not capital assets, any property that is used by a business to generate revenue, whether buildings, equipment or inventory, or musical literary or artistic works that you create.
Now, let's look at basis basis for the purposes of this, video is the cost of the personal or investment asset.
Any type of in-depth analysis of basis would take an entire video, but here are some oversimplified examples of how basis works.
You purchase a home for 150 000 at the time of purchase.
You pay 5 000 in closing costs.
Your basis in the home is thus 155.
000, if later on, you add a room onto the home for a cost of 35 000, the basis of the home would increase to 190 thousand dollars.
You purchase a new computer for 1800.
In addition, you paid 126 sales tax and two hundred dollars for delivery and installation.
The basis of this computer would be two thousand one hundred twenty six dollars.
You purchased one hundred shares of stock at twenty one dollars a share at the time you paid a transaction fee of three percent.
Your basis in the stock would be two thousand one hundred dollars, plus the sixty three dollar fee, or two thousand one hundred sixty three dollars.
So that's what we mean when we say that when a capital asset is sold for more than its basis, the result is a capital gain when a non-capital asset is sold for more than its basis.
The result is called ordinary income.
Ordinary income is the income.
We are all familiar with: it's the income that comes from our wages, business, profits, interest, retirement, social security, winnings and so forth.
This distinction is important because capital gains and ordinary income are taxed differently.
Ordinary income is subject to the regular tax rates shown in the chart to the right.
Certain capital gains are subject to special tax rates, which are lower than ordinary income tax rates to qualify for these rates.
A capital gain must be a long-term capital gain for a capital gain to be considered long-term.
The asset must be held for at least one year if the asset is held for less than that time.
The gain is considered to be short-term and subject to ordinary income.
Tax rates, long-term capital gains are taxed at either.
Zero percent, 15 percent or 20 percent chart shows the income brackets for the three different capital gains rates.
Income in this case means taxable income without considering the capital gain.
So let's take the example of ralph and alice, who are married with joint taxable income of seventy thousand dollars, which includes a long term capital gain of twenty five thousand dollars that gain would be taxed at zero percent.
The couple saves three thousand dollars by taking advantage of capital gains rates.
Now, let's look at billy, who is single and has taxable income of ninety thousand dollars, including a long-term capital gain of ten thousand dollars.
That gain would be taxed at fifteen percent.
In this case, billy saves 886 dollars by using capital gains rates.
Capital gains are reported on line 7 of form 1040.
They are added into adjusted gross income and taxable income, and then the tax on the eligible gains is computed on this qualified dividends and capital gains worksheet.
This worksheet is not included with the tax return, but is instead held with your tax records.
The actual mechanics of reporting capital gains on a tax return will be outlined in a future video, but what about capital assets that are sold for less than their bases? What happens to them? Tax-Wise when you sell a capital asset for less than your basis? This is known as the capital loss when capital losses exceed capital gains.
How they're handled tax wise depends on how the asset is used.
Capital losses on investment use assets can be used to reduce or offset other income.
This offset is limited to three thousand dollars per year.
Capital losses on personal use assets have no effect on taxable income and cannot be used to offset other income.
So, no, you can't have a yard sale where you sell a whole bunch of personal assets for less than what you paid for them and use the loss to offset other income, but also because of this proceeds from your yard.
Sale are not usually considered taxable income.
This video was designed to provide a brief and broad overview of capital assets and capital gains.
Far more detail will come in other videos, but for now you can check out the information in the links in the description below.
If you found this video informative, please give it a thumbs up and subscribe for more content.
Please share this video with anyone who would find it useful if you have any questions, comments or suggestions for future videos, please leave them in the comment space below thanks for watching and I'll, be back soon with more oversimplifications of your taxes and finances.
FAQs
What is a Capital Gain? (and how are they taxed?)? ›
Taxes known as capital gains are levied on earnings made from the sale of assets like stocks or real estate. Based on the holding term and the taxpayer's income level, the tax is computed using the difference between the asset's sale price and its acquisition price, and it is subject to different rates.
What are capital gains and how are they taxed? ›Capital gains taxes are a type of tax on the profits earned from the sale of assets such as stocks, real estate, businesses and other types of investments in non tax-advantaged accounts. When you acquire assets and sell them for a profit, the U.S. government looks at the gains as taxable income.
What is a capital gain in simple terms? ›Capital gains refers to profits gained from the sale of capital assets. Almost everything someone owns and uses for personal or investment purposes is a capital asset. This includes a home, personal-use items like household furnishings, vehicles, or intangibles such as stocks or bonds held as investments.
How much are you taxed on capital gains? ›| Rates | Single | Married Filing Jointly |
|---|---|---|
| 0% | Up to $40,400 | Up to $80,800 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 |
| 20% | Above $445,850 | Above $501,600 |
| Single Taxpayer | Married Filing Jointly | Capital Gain Tax Rate |
|---|---|---|
| $0 – $44,625 | $0 – $89,250 | 0% |
| $44,626 – $200,000 | $89,251 – $250,000 | 15% |
| $200,001 – $492,300 | $250,001 – $553,850 | 15% |
| $492,301+ | $553,851+ | 20% |
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
How do I avoid the capital gains tax on real estate? If you have owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.
What is a simple example of capital gains tax? ›For example, if you sell some stock shares anytime during 2022 and make a total profit of $140, you must report that $140 as a capital gain on your tax return for 2022. Capital gains taxes are owed on the profits from the sale of most investments if they are held for at least one year.
What are some examples of capital gains? ›- Real estate.
- Collectibles (stamps, coins, antiques)
- Stocks.
- Bonds.
- Personal property.
- Cryptocurrencies.
- Vehicles.
For example, say you purchase 100 shares of a stock for $120 per share. Your basis in the stock is $12,000. You later sell all 100 shares for $145 per share, or $14,500. Your capital gain would be $2,500.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out.
Is capital gains added to your total income and puts you in higher tax bracket? ›Long-term capital gains cannot push you into a higher income tax bracket. Only short-term capital gains can accomplish that, because those gains are taxed as ordinary income. So any short-term capital gains are added to your income for the year.
Is capital gains tax federal or state? ›Capital gains are taxable at both the federal level and the state level. At the federal level, capital gains are taxed at a lower rate than personal income.
How much capital gains do you pay on $100 000? ›In this example, you see a capital gain of $100,000 on your home sale. If your income and asset class put you in the 20% capital gains tax bracket, you pay 20% of your profit. That's 20% of $100,000, or $20,000. You don't need to pay 20% of the entire $350,000 sale because you had to spend $250,000 to buy the asset.
What is the capital gains tax on $45000? ›| 2020 Long Term Capital Gains Tax Brackets | ||
|---|---|---|
| Tax Bracket/Rate | Single | Head of Household |
| 0% | $0 - $40,000 | $0 - $53,600 |
| 15% | $40,001 - $441,450 | $53,601 - $469,050 |
| 20% | $441,451+ | $469,051+ |
States With No Capital Gains Tax
Those include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. It's no coincidence that these eight are also no personal income tax states.
To avoid paying capital gains taxes (and any depreciation recapture), you can reinvest in a "like-kind" asset with a sales price of at least $500,000. The IRS allows virtually any commercial real estate property to qualify as 'like-kind” as long as you hold it for investment purposes.
What is the one time capital gains exemption? ›Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
What lowers capital gains tax? ›How do I avoid capital gains taxes on stocks? There are a few ways to lower the capital gains tax bill you pay on profits from the sale of stock. You can claim your fees as a tax deduction, use tax-loss harvesting, or invest in tax-advantaged retirement accounts.
How long to live in a house before selling to avoid capital gains? ›1. Live in the house for at least two years. The two years don't need to be consecutive, but house-flippers should beware. If you sell a house that you didn't live in for at least two years, the gains can be taxable.
Do I have to pay capital gains tax immediately? ›
You do not have to pay capital gains tax until you've sold your investment.
How long do I have to buy another property to avoid capital gains? ›How Long Do I Have to Buy Another House to Avoid Capital Gains? You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
How much is capital gains tax 2023? ›| Rate | Single | Head of Household |
|---|---|---|
| 0% | $0 – $44,625 | $0 – $59,750 |
| 15% | $44,626 – $492,300 | $59,751 – $523,050 |
| 20% | $492,300+ | $523,050+ |
Regarding your question, “Is inheritance taxable income?” Generally, no, you usually don't include your inheritance in your taxable income. However, if the inheritance is considered income in respect of a decedent, you'll be subject to some taxes.
What triggers capital gains? ›A capital gain occurs when you sell something for more than you spent to acquire it. This happens a lot with investments, but it also applies to personal property, such as a car.
Is Social Security taxable? ›Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).
How much capital gains are you allowed in a lifetime? ›Are there lifetime limits to how much capital gains taxes I must pay? There is no limit, either on how much you can gain from rising appreciation in assets or the amount of taxes you can owe.
Is capital gains considered income? ›Capital gains are profits from the sale of a capital asset, such as shares of stock, a business, a parcel of land, or a work of art. Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate.
Does capital gains affect Social Security? ›No. Income that comes from something other than work, such as pensions, annuities, investment income, interest, IRA and 401(k) distributions, and capital gains is not counted toward the earnings limit and will not affect your benefit.
What percentage is deducted for Social Security and Medicare? ›NOTE: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings.
Do you get double taxed on capital gains? ›
But are those capital gains taxed twice? It depends. When it comes to traditional asset investments (such as stocks), proceeds from the sale can be taxed twice, once at the corporate level and again at the personal level. Then there are capital gains at the state level.
Is money from sale of house considered income? ›You are required to include any gains that result from the sale of your home in your taxable income. But if the gain is from your primary home, you may exclude up to $250,000 from your income if you're a single filer or up to $500,000 if you're a married filing jointly provided you meet certain requirements.
Do long-term capital gains count as income? ›Gains from the sale of assets you've held for longer than a year are known as long-term capital gains, and they are typically taxed at lower rates than short-term gains and ordinary income, from 0% to 20%, depending on your taxable income.
Do capital gains count as income for Social Security? ›No. Income that comes from something other than work, such as pensions, annuities, investment income, interest, IRA and 401(k) distributions, and capital gains is not counted toward the earnings limit and will not affect your benefit. Join our fight to protect Social Security.
Do capital gains increase your tax bracket? ›While capital gains do not affect your income or income tax bracket, those gains can impact your Adjusted Gross Income. The IRS explains that AGI consists of “… gross income minus adjustments to income.
Do you pay both capital gains and income tax? ›Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. A capital gain is realized when a capital asset is sold or exchanged at a price higher than its basis.
What happens if you don't report capital gains? ›Missing capital gains
If you fail to report the gain, the IRS will become immediately suspicious. While the IRS may simply identify and correct a small loss and ding you for the difference, a larger missing capital gain could set off the alarms.
For example, if you sell some stock shares anytime during 2022 and make a total profit of $140, you must report that $140 as a capital gain on your tax return for 2022. Capital gains taxes are owed on the profits from the sale of most investments if they are held for at least one year.
How do I get the $16728 Social Security bonus? ›To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
At what age is Social Security no longer taxed? ›Social Security benefits may or may not be taxed after 62, depending in large part on other income earned. Those only receiving Social Security benefits do not have to pay federal income taxes.
How much money can you have in the bank on Social Security retirement? ›
The Social Security Administration does not limit the number or value of resources or assets you may own.
Do capital gains affect Medicare premiums? ›Yes, capital gains are part of the MAGI calculation. For many taxpayers, the MAGI is similar to the AGI (adjusted gross income), but it can be higher, depending on your circumstances. MAGI is your AGI (line 11 of Form 1040) plus tax-exempt interest income.
What will capital gains tax be in 2023? ›| Rate | Single | Married Filing Jointly |
|---|---|---|
| 0% | $0 – $44,625 | $0 – $89,250 |
| 15% | $44,626 – $492,300 | $89,251 – $553,850 |
| 20% | $492,300+ | $553,850+ |