Capital Gains Tax and You – Do You Need to Pay?

capital gains tax

Did you make a successful investment this year, or did you sell a property? If that’s the case, you may need to pay capital gains tax.

This is a perplexing aspect of the tax code, and we are going to make it much clearer for you.

Table of Contents

What is Capital Gains Tax?

Investors from small fish to huge firms are all eligible to pay capital gains tax. Practically all money gained through an investment is taxable, and you need to be aware of that.

Capital gains tax is essentially investment income taxes. They apply to most common investments, such as bonds, stocks, and property. The money you get back when you sell or receive a dividend is eligible to be taxed.

However, there are a few factors that determine whether you can claim a capital gains tax deduction:

  • How much you make
  • Your tax bracket.
  • How long you held the investment for
  • What you paid for the investment

Your Filing Status

How much you owe in capital gains largely depends on the tax bracket you fall into. Naturally, your income is the deciding factor in this.

The more you make, the more tax you’ll have to pay. Your filing status is important, so make sure you check out the current tax brackets for your filing status.

How Long Did You Hold the Investment?

The IRS breaks investments into short-term and long-term investments.

For the IRS, short-term investments are considered to have been held for one year or less. Anything over this is regarded as a long-term investment.

As of this writing, short-term investments are given the same tax rate as your wages. Long-term investments, however, are taxed at reduced rates, which could be anything from nothing to 20%.

What Tax Do You Pay on Investment Income?

capital gains losses

Many Americans invest in the stock market, and many of them make money. The profit made from the sale of a stock or bond is taxed

The amount you owe, in this respect, is determined by how long you held the investment, your filing status, and the tax bracket you fall into.

Do I Need to Pay Capital Gains on Real Estate?

Real estate is another asset you will need to pay capital gains tax on when you sell it. If you make a profit when you sell the property, you will need to pay capital gains tax on that profit.

The rate in capital gains tax mainly depends on whether it was a short-term or long-term investment.

What About Selling My Home?

Selling your primary residence works differently from selling an investment property. If you make a profit on your primary residence, the chances are you won’t have to pay capital gains taxes on that profit.

There are exclusions for this. Single taxpayers can exclude $250,000 of the gain, whereas a married couple filing together get an exclusion of $500,000 of the gain.

The catch is that your spouse also must have lived in the home for a specific amount of time.

The criteria to get the capital gains exclusion is:

  • You owned the home for at least two years of the last five-year period.
  • The property was your primary home for that same period. The day of sale isn’t counted.
  • You haven’t taken a capital gains exclusion on your property within the last two years.

What if I Inherit a Home?

You may have inherited a home when a relative died. If you sell this home, you will need to pay capital gains tax as it will be treated like any other type of investment property.

That is if it’s sold for more than the fair market value when the relative in question dies.

What About Capital Losses?

Capital gains tax doesn’t apply when an investment loses you money. It’s possible to reduce your capital gains tax liability by using the losses from one investment to offset the gains from another investment.

Let’s use an example to illustrate this. You made $15,000 in investment income last year. The problem was you lost $5,000 on a property you sold.

The capital loss of $5,000 can be taken away from the investment income, thus reducing your tax liability. When capital losses are bigger than capital gains, the loss can always be deducted when you file your taxes.

Reporting Capital Gains and Capital Losses on Your Return

reporting capital gains

Form 8949 and Schedule D are the two forms you need to map out capital losses and capital gains.

This will also help you to calculate whether you owe money or not as you write each item down line-by-line.

Gains are only paid after losses are taken away.

Do I Have to Pay Capital Gains Tax this Year?

Online tax filing companies are perfect for navigating your personal situation and determining whether you can claim a capital gains deduction this coming year.

They will be able to guarantee accuracy and ensure you don’t have to refile your taxes or deal with a nasty audit.

Many people dread tax season, but the process doesn't have to be stressful. One way to make filing your taxes easier is to get your W2 online.

Many companies offer employees the option to download their W2s from online portals, which can save time and hassle when it comes time to file your taxes.