The government has increased the capital gains rate from 15% to 20% for most people. Special types of net capital gain can be taxed at a higher rate.
It is important to understand what a capital asset is and how they could affect your tax situation.
The Barron's Dictionary defines a capital asset as "a long-term asset, or asset with a life exceeding one year, that is not bought or sold in the normal course of business".
To clarify what capital gains are we will discuss the following 10 facts.
1. Many of the things you own and use for personal or business or investment purposes, including houses, cars, trucks, or boats are capital assets. Items that you consume are not capital assets. Generally, most things that you buy for personal use are worth less when you sell them than when you bought them so you do not need to worry about the taxes.
2. You have a capital gain or capital loss if you sell a capital asset for more or less than the amount you paid for that asset. The difference is a capital gain or loss.
3. According to the IRS you must report all capital gains whether it is business or personal. This does not mean that you have to report the amount of money you got when you sold a bicycle or home furniture (unless it is in the antique category).
4. You may deduct capital losses only on investment or business property, and not on property held for personal use. It seems a bit lopsided to have to pay taxes on all gains but not be able to take the loss. But, who said the IRS was fair.
5. When you sell a capital asset and make a profit then you have to pay taxes on the profit. The tax rate depends on whether you had the asset for less than one year or more than one year. If you had the asset for less than one year the tax rate is "short term" and if you owned it for more than one year it is "long-term" (lower tax rate). There are always some exceptions.
6. Subtract your long-term losses from your long-term gains and you owe taxes on the difference if you made more money than you lost.
7. The tax rate for short term capital gains is more than the tax rate for long term capital gains. The tax rate for long-term capital gains went up in 2010 from 15% to 20% for most people. Some tax rates are higher. Short-term tax rates are at the individual tax rate.
8. When your capital losses exceed your capital gains you can take a deduction of up to $1,500 or ($3,000 married filing jointly).
9. If your losses are more than you are allowed to deduct in that year than you can carry the losses forward (meaning that you can deduct your allowed amount each year until all of the losses have been deducted). With the downturn in the economy many people lost a lot of money. It seems that it will take years before they will be able to deduct all their losses.
10. To report capital gains or losses use the tax form, Schedule D, then the final number is put on your tax form 1040.
Each year the IRS changes hundreds of things in the tax code. It is one of those things that you have to keep on your toes about. We try to keep up with the changes that will affect our audience.
If you have a question that is not covered on the blog. Do not hesitate to ask a question in the comments section.
Although we are not CPAs or tax attorneys we do extensive studying of the tax code and will give you what we find out.
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