Capital gains tax is one of those taxes that seems to rear its ugly head just when you think you have found a way to earn a few bucks on the side. It’s a tax that can seem complicated at first glance and one that may even stop you from selling the thing you want to sell. But it’s actually quite simple once you understand a few basic rules, as discussed in this guide to capital gains tax.
What are Capital Gains?
In the broadest sense, capital gains are the profits incurred by individuals or corporations from the sale of certain types of goods, and capital gains tax is the tax levied on these profits. In layman’s terms, capital gains is the profit that you make from the sale of investments and capital gains tax is the government’s share.
This tax is charged in most countries, so it’s not exclusive to the United States. However, US capital gains law is different to other countries and it can also change from person to person.
When to Pay Capital Gains Tax
If you sell an asset for profit and that asset is not part of your business, then you may be liable for capital gains tax. How much you pay and whether you will pay anything at all will depend on several factors, which we will discuss soon.
The most common query regarding capital gains tax is from individuals investing in gold, silver and other precious metals. The individuals may be self-employed, they may be employed by an organization. They could be students in college. In both cases they will be required to calculate capital gains tax based on the profit (if any) from the sale of those precious metals.
If they buy a gold bar for $50,000 and later sell it for the same amount, no capital gains tax will be due. If they buy for $50,000 and sell for $60,000, they may be liable for tax on the $10,000 profit.
If you are a self-employed trader or run a business that involves trading, then you won’t be liable for capital gains tax and will instead be taxed according to the income of your business. There are other exceptions as well.
How Much is Capital Gains Tax?
If no profit is made or if you fall within the two lowest income brackets (up to $38,600 in 2018) then you will not need to pay capital gains tax. If you are taxed within the 35% or 37% bracket then you will be required to pay 20% on most capital gains, with the exception of depreciated real estate, collectibles and art, which may be taxed at higher rates.
However, this only applies to long-term capital gains, which are investments that you have held for longer than a year. If you held the investment for less than a year than you will be taxed as if it were additional income and in this case there are no exceptions for individuals in the bottom two tax brackets.
Capital Gains Tax on Held Assets
If you hold onto your assets then you will not need to pay capital gains tax. There are exceptions for investments that return dividends or regular profits, as is the case with stocks and rented properties, but where collectibles, art and precious metals are concerned you will not need to pay anything until it comes time to sell your investment.
Capital Gains on Collectibles
Many Americans buy and sell without even thinking about capital gains tax, let alone paying it. This is especially true where video game, comic book and action figure collectors are concerned. They buy to collect, they keep their collections safe and when money is tight, they sell. Capital gains tax doesn’t cross their mind, but it should because those collectibles are just as liable for this tax as precious metals or even real estate.
There are no exceptions just because something had little inherent value or because it is considered to be a toy. If it was sold for profit then that profit may be liable for capital gains tax.
Capital Gains Tax on Real Estate
You may be taxed on the sale of your main residence and any additional homes. However, a law passed in 2017 excludes up to $250,000 from a individual’s sale of his or her family home, with married couples getting an exemption of $250,000 each. This is subject to several terms and requirements, but it means that if you bought your home with a spouse 20 years ago for $300,000 and sell it for $1 million, then you will be subject to capital gains tax on $200,000.
Capital gains from the sale of property excludes the cost of any work done in the house, from extensions to maintenance and more. In the above scenario, if you can prove that $100,000 was spent on the home over that two decade period then you may only need to report $100,000 in capital gains. This loss is referred to as “capital loss” and it can be used to bring those high capital gains down to more realistic amounts.
It only makes sense, because that added investment essentially helped to improve the worth of the initial investment, which in turn increased the sale price and the tax. Capital loss also includes all of the other investments that you have. If you invested $10,000 in each gold and silver and them a year later, selling the former for $15,000 and the latter for $5,000, then your resulting profit would be $0, which means your capital loss would offset your capital gains and you won’t owe any money.
How to Calculate Capital Gains?
It is actually very easy to calculate how much capital gains tax you need to pay. If you are within the 22% tax bracket, earning $40,000 a year and you sell an asset for a profit of $5,000, then you will need to pay 22% on that as well, costing you $1,100 of your profit. If you earn less than $425,000 (based on 2018’s figure) then you should be charged 15% on long-term investments, but it may depend on what those investments are.