When Do You Need to Pay Capital Gains Taxes?
Investors pay capital gains taxes when an advantage appreciates in value within the initial purchase price. According to the Internal Revenue Service (IRS), capital assets include houses, furniture and personal investments such as stocks and bonds. For tax purposes, the initial purchase price of this asset is referred to as a basis. An advantage may appreciate in value over the basis price, resulting in a capital gain if the asset has been sold at the higher price. Alternately, selling an asset whose value depreciates below the basis results in a capital reduction.
TIPRA
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) exempts investors whose income is currently taxed at the 10 percent and 15 percent brackets from paying capital gains taxes. In accordance with the law, long-term investments offered from 2008 through 2010 are completely free of capital gains taxes. Since most U.S. taxpayers are in the 10 percent and 15 percent tax brackets, extending a capital gains tax exemption to this category of taxpayers provides capital gains tax relief for the majority of investors.
Short-Term Investments
Short-term investments are held for less than 1 year, and their capital gains are taxed according to personal income tax rates. For instance, if an investor in the 25 percent tax bracket invests $10,000 in stock and sells following nine months for $11,000, the $1,000 capital gain is taxed at 25 percent. The maximum tax rate employed to short-term investments is 35 percent, as this is the highest personal income tax rate employed by the IRS.
Long-Term Investments
Long-term investments are held for longer than a year and subject to capital gains tax, which is lower compared to personal income tax rate applied to short-term capital gains. According to the IRS, the maximum capital gains tax rate on long-term investments is 15 percent, as of 2009. However, this rate applies only to taxpayers whose income has been taxed at the 25 percent bracket and higher.
Collectibles
Investors in collectibles like coins and art must pay capital gains tax if the sale price of an item is higher than its cost. Investors in sidewalks are subject to tax rates that are based on the income tax bracket of the investor. For instance, a higher-income taxpayer in the 35 percent tax bracket is liable to get a 15 percent capital gains tax on the sale of their collectible.
Property
The sale of property additionally creates capital gains that must be reported to the IRS. However, IRS principles indicate that only certain property is subject to capital gains tax. For instance, the sale of a house that produces a capital gain for the vendor is subject to capital gains tax. However, proceeds from the sale of personal property in the house, like washing machines, draperies and lawn furniture, are not regarded as appreciable investments rather than subject to capital gains taxes. However, the proceeds from the sale of personal property are subject to personal income tax.