Posted by Simon Hase, CPA

Tax Treatment for Long Term Capital Gains

Tax Treatment for Long Term Capital Gains

There are not many laws that encourage you to hang on to an asset longer than you already have, but long term capital gains tax treatment laws do just that. Your tax rate on capital gains can vary significantly depending on how long you have held the asset. Capital gains can be very beneficial, but they can also be somewhat complicated to see if your particular asset sale qualifies. Talk with the experts at Kaufmann Advisors to determine how your sale of an asset should be treated.

Staring at the Basis

The capital gain that you have on an asset will depend on how much the asset’s tax basis is. If you have no idea what I mean by basis, you are definitely not alone. To understand capital gains, however, you also need to understand what is meant by a “basis.”
 The basis is a unique tax concept. The basis of a property is used to figure out depreciation, amortization, gains and losses, and other potential tax issues. Sometimes it is simply the amount of money that you paid for particular item, but other times there are adjustments to this amount that are important for calculating your capital gains.

 Usually, you start with how much the asset cost you to purchase. This includes any amount that you would have paid on credit for the item. It also includes any related costs from obtaining the item like sales taxes or delivery fees. For stocks and bonds, the basis includes the actual costs of the assets and any commissions, recording, or transfer fees.

 Then, this number is adjusted based on the regular wear and tear of the asset, or the simple fact that is not new any longer. For regular assets, any change in the basis is usually the result of depreciation. Find a tax preparer who works with depreciation to answer questions related to this concept. For stocks and bonds, however, the basis likely will not change much because they are not depreciated.

Calculating Capital Gains or Losses

Once you have determined your basis, figuring your capital gain is relatively easy. All you have to do is take the amount that you sold the asset for and subtract the adjusted basis from the sale price. Then, this number is your capital gain or loss.

Long Term and Short Term Capital Gains

Long term capital gains result where you have a gain on an asset that you have held for at least one year. Short term gains are held less than one year. Keep in mind that the clock starts the day after you acquire the asset, and it includes the day that you sell the asset. Knowing whether you have a long term capital gain or a short term capital gain is important because the two types of gains have different tax treatment.

 Short term capital gains do not get any favorable tax treatment when compared to the rest of your income. They are taxed exactly like the rest of your income—which means that a tax rate of 10 percent to 39.6 percent will likely apply (for 2015).
 Long term capital gains, on the other hand, do get favorable tax treatment. They have a reduced tax rate on the profits from the sale of an asset that you have held for a year or more. The long term capital gains rates for 2015 are 0 percent, 15 percent, and 20 percent for the majority of taxpayers. Generally, if your regular tax rate is under 15 percent, then you may be able to take advantage of tax-free capital gains.

Rules Regarding Capital Losses

If you have suffered a capital loss, you may be able to use this loss to offset your income. When your adjusted basis is more than your selling price, then you have suffered a capital loss. You can only use these losses in a particular way

  1. Short term losses can offset short term gains.
  2. Long term losses can offset long term gains.
  3. Then, if you have losses left over, you can combine them (whether they are long term or short term), and offset whatever type of gain remains.
  4. If you still have a loss after doing all of this, then you can use up to $3,000 of that loss against your regular income.
  5. If you still have losses, you can use these to carry over to the next year.

Using capital gains and losses the right way can provide a significant tax savings for some tax payers, particularly those who have high capital investment income. Kaufmann Advisors can help you with tax strategies that will ultimately help you avoid higher tax rates and payments. Use the profile link below to find out more about us, or use the Contact button to get in touch with us right away.

Simon Hase, CPA
Contact This Member