What Are Capital Gains?

Congratulations on meeting the April 15th deadline for taxes! You won’t have to worry about them until next year! But, in the meantime, the Mastanduno Law Group suggests that you look a little bit to the future and consider capital gains for next year’s taxes; you might be able to match your losses and use them to offset your current and future taxes. It’s generally a good idea to take stock of your assets and think about whether you are interested in disposing of them as the year continues.

Capital gains can apply to almost everything you own and use, whether for pleasure or for investment. They are when a “capital asset” increase in value resulting in a higher value than the original purchase price. Capital gains are usually applied to mutual funds, stocks, art sales, real property, and vehicles; these are what we call capital assets and can generally be understood as property that you possess for more than a year whose value is likely to change. That being said, business income is unrelated to capital gains because it counts as business revenue and requires filling out a different tax form – essentially, its regular income as opposed to a capital gain. Your home is often considered exempt from capital gains but that depends on particular circumstances; generally, when you sell a capital asset, you are taxed on the gain, so when you sell your house you pay taxes on the amount that it has increased in value since it was purchased. The purchase price is what we call the basis. If there’s a question about how much your property has increased in value or whether you will have to pay capital gains taxes, you may want to confer with a lawyer or an accountant.

If you decide to sell a capital asset, such as the examples discussed above, setting a fair price can be a challenge. Investors sometimes have some dissonance between the amount they paid for the investment and the original purchase price. If you sold something for a price higher than the amount you paid for it, the IRS will be interested in knowing about the extra money acquired. You will likely be taxed on that money. The IRS will tax at a rate determined by your tax bracket. Taxpayers can try to match their losses with gains to lower their tax rate, but the gains and losses must be reported to the IRS each year on April 15th with a Schedule D – 1040 form. There are a few suggestions that cancel out the capital gains taxes, such as exchange of traded funds and contributions to a ROTH IRA or health savings account. But, racking up losses to match your gains is something that you need to share with a lawyer and an accountant so they can give you advice on your individual situation.

Selling a capital asset is a big decision. Even if you have plans to sell the asset later in the year, it involves more understanding of the process, depreciation and the effects of finalizing the sale.