Whether you’re new to the world of investing, or you’re thinking of selling stocks, bonds, or real estate you’ve had for some time, it is important to consider how you’ll be taxed on those items.
Since you only pay tax on the profit you make, it’s necessary to keep good records from the time you acquire an asset through the sale process. A few different factors, including how long you held the asset and your marginal tax bracket, influence how much you’ll pay.
Below are the definitions and general tax rules for capital gains and losses.
What Are Capital Gains and Losses?
In order to fully understand what you’re dealing with, you need to first be familiar with some basic terminology. Here are a few terms you need to know:
- Capital Asset. Generally, the term refers to stocks, bonds, real estate, or other assets that have a value. The IRS defines pretty much everything you own as an asset, including your home, vehicles, and possessions. (If you have a business, this excludes anything that is used for your business or belongs to your business.)
- Capital Gains. A capital gain is profit that you receive after selling a capital asset, minus its original cost. During the time that you own a capital asset, such as a share of stock, you don’t pay taxes on stock gains. When you sell the share of stock, however, you may have to pay tax on your profit. In order to determine your profit, you’ll generally take the amount you paid for the share, plus any fees you paid, and subtract that from the amount you sold it for.
- Capital Loss. This occurs when you sell a capital asset but don’t recoup the amount you paid (i.e. you took a loss on it).
- Cost Basis. Simply put, this is the amount you paid for an asset, including any fees or taxes.
Now that you know how to define your investments, take a look at how the IRS handles them.