| Capital Gains |
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Income tax ramifications Under the U.S. Tax Code's section 1222, gain or loss from sale or exchange of a capital asset is a capital gain or loss. Per IRS Tax Topic 409, "Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account." If a person sells a capital asset for more than he or she paid for it, the gain is taxable. However, for personal-use capital assets, such as a personal automobile, a capital loss is not deductible. Long term vs. short term Generally, appreciated capital assets that are sold after being held more than one year (long-term capital gain) will be taxed at a maximum rate of 15%. For the sale of collectibles and small business stock, the capital gain rate is 28%. Appreciated capital assets that are sold after being held less than one year (short-term capital gain) will be taxed as ordinary income, which rises as high as 35% in the progressive tax system. Realized vs. unrealized Capital gains can be either realized or unrealized. Realized capital gains occur when the actual sale of the asset returned more money than the purchase price. Unrealized capital gains occur when it is known that the asset has appreciated in value, but the asset has not been sold yet; the gain is only potential. Currently in the US, unrealized capital gains are not subject to Income Tax . Capital loss offset In taxation in the United States, capital gains are subject to capital gains tax, but if a taxpayer has suffered from capital losses in the same year, he can offset the gains with the losses to reduce his taxable income. If the losses exceed the gains, then up to $3,000 may be deducted to offset ordinary income. References For further information, go to Tax Topic 409 at the IRS: http://www.irs.gov/taxtopics/tc409.html |