Capital Gains Tax? Yes, besides sales tax, excise tax, property tax, income tax, and payroll taxes, individuals who buy and sell personal and investment assets must also contend with the capital gains tax system. If you sell assets like vehicles, stocks, bonds, collectibles, jewelry, precious metals, or real estate at a gain, you’ll likely pay a capital gains tax on some of the proceeds.
Capital gains rates can be as high as 39.6%, and as low as 0%. Therefore, it’s worth exploring strategies to keep these taxes at a minimum.
Capital Gains Tax Basics
A capital gain occurs when the sales price you received for an asset is greater than your basis in that asset. The “basis” of an asset may be the price you paid for it. However, if you’ve made improvements to the asset, the cost of the improvements increases your basis. If you’ve depreciated the asset, that decreases your basis.
Capital Gain Tax Rates
There are two different tax schemes for capital gains:
- Short-Term Capital Gains are gains on assets you have held a year or less. Short-term capital gains are taxed at the same rates as ordinary income. This is the same rate that you pay on work wages, freelancing income, or interest income. The tax rate you must pay varies based on your total taxable income, but the tax rates for 2017 are between 10% and 39.6%.
- Long-Term Capital Gains are gains on assets you have held longer than one year. Long-term capital gains are taxed at more favorable rates. Current tax rates for long-term capital gains can be as low as 0% and top out at 20%, depending on your income. Gains on the sale of collectibles are taxed at 28%.
Exclusion for Sale of Primary Residence
Special rules apply to the capital gains when you sell your primary residence. If you meet the ownership and use tests, you can exclude up to $250,000 if you are unmarried, or $500,000 if you are married and filing a joint return. The tests mentioned are met if you own and use your house as your primary residence for two out of the five years immediately preceding the date of sale.
You can meet the ownership and use tests for different two-year periods, but both tests must be met within the five years immediately preceding the date of sale. This exclusion of capital gains is sometimes referred to as a Section 121 exclusion.