Othe hat is the capital gains tax? is a frequent request from taxpayers as tax season begins. To begin with, the IRS classifies taxable income into one of two categories: capital gain or ordinary income. You can use the following list of ordinary income to figure out where you stand with taxes:
- Salary versus hourly wage
- interest income
- Income from self-employment (for example, self-employment or running your own business)
- Rental income
On the contrary, capital gains income is the result of selling certain items of your personal property for more money than you bought. Here are some examples of transactions that may result in capital gains:
- Sale of shares
- Mutual fund sales
- Housing sales
Capital transactions come in two forms: short-term and long-term. Short-term transactions occur when an asset is sold within one year of the initial purchase. Ordinary income is taxed in the same way as short-term capital gains. Long-term capital gains, on the other hand, are those that occur when the taxpayer has owned the asset for more than one year and are subject to capital gains tax rates.
The top ordinary income tax rates are higher than the top capital gains tax rates at most times in our history, including right now. Therefore, you would choose income from a capital gains transaction rather than an identical event that would result in ordinary income.
How to calculate capital gains and taxes?
Simply deduct the cost of the asset you sold from its sale price to calculate the size of a capital gain or loss. You get a capital gain if your cost is lower than the selling price. Depending on your income, your long-term gain will be taxed at a rate of 0%, 15% or 20%.
A short-term gain will be taxed at your marginal tax rate as ordinary income. You incur a capital loss if your cost is greater than your selling price. Capital losses that exceed $3,000 can be deducted from your income.