Are you planning to sell something such as a share of stock, for more than you paid for it? Then you’re generally going to be taxed on the value that increased. The term “capital gain” is use to describe this increase in value.
To calculate the amount of gain, the proceeds received from the sale is deducted with your “cost basis” in the asset.
Cost basis – In most cases, the amount that you paid for the asset as well as any brokerage commissions that you paid on the transaction is your cost basis in an asset.
For example, you bought a share of Google stock for $250 with brokerage commissions. You owned the shares for two years and you decided to sell it for $400. This means your cost basis is the amount you paid for it and that’s $250. The calculation of your gain will look like this: $400 (proceeds from sale) - $250 (adjusted cost basis) = $150 (capital gain).
A capital gain is charged with a tax rate depending on whether it was a long-term capital gain (LTCG) or a short-term capital gain (STCG). It’s a short-term capital gain if the asset in question was held for one year or less. It’s a long-term capital gain, if the asset was held for more than one year.
Normal income tax rates are usually applied towards STCGs. LTCGs on the other hand are taxed with a similar rates as qualified dividend income.
If LTCGs fall below $39,375 of taxable income ($78,750 for married filing jointly), they are taxed at a 0% rate for 2019. If they fall above the 0% threshold but below $434,550 ($488,850 for married filing jointly), the tax rate is at 15%.
Therefore, if you’re planning to sell an investment that has increased in value, the best thing to do might be to think about holding the asset long enough for the capital gain to be accepted as long-term.
You have to remember that a capital gain only occurs when the asset is sold. The fluctuations in the value of the asset are not considered taxable events so it’s important that you know about this.
A collection of a large quantity of other investments is what mutual funds entails. Let’s say a mutual fund may own thousands of different stocks including other investments such as bonds or options contracts.
Income tax on her share of the net capital gains realized by the fund over the course of the year is the responsibility of each mutual fund shareholder each year. On Form 1099-DIV sent by the brokerage firm or Fund Company, each shareholder’s portion of the gains will be reported to her annually.
The capital gains in any given year realized by the fund could vary significantly from the actual change in value of the shares of the fund which makes this situation counterintuitive.
If you’ve owned a home for many years and you sold it, this can result in a very large long-term capital gain. The good news is that there’s a good chance you can exclude (meaning not have to pay tax on) a large or even all of that gain.
You have the right to exclude up to $250,000 of gain if you meet the three requirements. These requirements are as follows:
The two-year time period do not necessarily have to be made up of 24 consecutive months in order to meet the second and third requirements.
A $500,000 maximum exclusion is available for married couples filing jointly, provided that both spouses meet the first and third requirements and at least one spouse meets the second requirement.
If you’re still confused and unsure of how long-term capital gains work and the tax preparations involved, it might be a good idea for you to consult a tax professional and a financial advisor who can help you resolve issues or help you make wise decisions for your property investments.
YourIRSTaxAdvocate.com