What is Capital Gains Tax?

Have you downsized your home or had the opportunity to sell stocks this year? Are you wondering about the tax implications? If you made a profit this year from selling larger-ticket items, you may be on the hook to pay a capital gains tax.

What Is Capital Gains Tax?

If you made money from the sale of an asset, like a piece of land, a business or a share of stock, this is considered taxable income. These profits are considered “taxable gains.” The tax you pay on this is known as a capital gains tax. There are two types of capital gains tax:

• Short-Term Capital Gains Tax — This is a tax levied on property held for a year or less. The income you receive from a short-term investment that led to capital gains is simply factored into your income tax rate.
• Long-Term Capital Gains Tax — This is a tax on profits from the sale of property that you have held for more than a year. Tax rates are 0%, 15% or 20%. The rate you are taxed at is determined by the income tax bracket you fall into on your income tax filing status.

Do I Need to Pay Capital Gains Tax on Anything I Sell?

Capital gains taxes are generally reserved for things like real estate and stocks, but can be applied to “collectible assets” like coins, precious metals, art and antiques. Generally speaking, the profit you earn from selling these types of things will be taxed at 28% (rather than applied to your income as a long-term gain). If you have owned these items for a year or less at the time of the sale, you would add the income you earned into your income tax rate (as you would with any other short-term capital gain). 

Can You Avoid Paying Capital Gains Taxes?

If you are looking to avoid paying hefty tax fees, it may be wise for you to put your earnings — your gains — into a tax-advantaged account, like a 401(k), individual retirement account (IRA) or 529 college savings account. These accounts grow tax-free or tax-deferred, meaning you may avoid taxes until the funds are dispersed.

Ask a Professional

Not sure if what you sold counts as a capital gain? The provisions can be confusing! If you have questions, consult with a financial professional. They can help you understand the specific provisions it takes to be considered a capital gain, and they can clarify your tax liability for the gains you received. Talk to your Farm Bureau agent or financial advisor for more information.