5 Things You Need to Know about Capital Gains Tax

Today, we are going to talk about capital gains tax. If you have ever sold a stock for more money than what you paid for it, then you have dealt with capital gains tax. It is the tax that investors pay on profits from selling certain investments. It is crucial for every taxpayer to understand capital gains tax to ensure no issues with your tax returns. Robert Hall & Associates’ team of tax preparers can help you with that.

Capital Gains for All

Capital gains tax isn’t just for those owning corporations or the selling of real estate. It applies to everyone. If you have made money on the sale of an asset, you may have to pay capital gains tax. In fact, every single item you possess is a capital asset like stocks, real estate or even personal items such as a car.

If you sell an item for more than the price you paid for it, that difference is a capital gain that you will then report to the IRS. The price you paid for the item is generally your starting point. It covers not just the item’s cost, but also any extra fees you have to pay to obtain it. This includes things such as shipping and handling fees, the cost for improvements and upgrades, setup and installation fees, sales tax and other taxes.

Capital losses can offset capital gains

Investments don’t always increase up in value, as anyone with a lot of financial expertise can tell you. Their values can also just fall and decline. A capital loss occurs when you sell something for less than its original cost. Capital losses from investments can be used to offset capital gains but not from the sale of personal property.

An example would be in the case of the sale of stocks. Let’s say that you earned $100,000 in long-term gains from the sale of a set of stocks, but you also incurred $75,000 in long-term losses from the sale of another set of stocks, then you may only be taxed on $25,000 worth of long-term capital gains.

  • $100,000 – $75,000 = $25,000 long-term capital gains

If your capital losses exceed your capital gains, you can use the loss to compensate up to a certain percentage of your other income. Moreover, you can carry them forward to offset future capital gains or income in future years should you have an excess of capital losses.

Your home is (mostly) exempt from Capital Gains Tax

For many people, their single biggest asset is their house, and depending on the real estate market; a homeowner might achieve a significant cash gain on a sale. The good news is that the tax legislation permits you to defer paying capital gains tax on part or all of such a gain if you fulfill three criteria:

  1. You haven’t deducted the profit from a previous property sale in the two years leading up to the sale.
  2. In the five years leading up to the sale, you owned the house for at least two years.
  3. During that same five-year period, you lived in the house as your principal residence for at least two years.

If you meet the following conditions, you can exclude up to $250,000 of your gain if you’re single, $500,000 if you’re married filing jointly.

Business income isn’t a capital gain

For those who run firms that buy and sell things, your profits will be treated as business income and taxed accordingly, rather than capital gains.

Many individuals, for example, do re-selling where they purchase goods at antique stores and garage sales and then re-sell them on the internet. If you do this intending to gain a profit, the IRS will consider it a business.

The money you spend on purchases is considered a business expense, and the money you receive is profit from your business. The difference of both is the business’s income which is now subjected to employment taxes.

No matter what type of investment you own, Robert Hall & Associates has the right team of tax advisors and tax preparers ready to guide you through the intricate world of Capital Gains Tax. Schedule a free consultation now or call us at 818.925.7594!

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