![]() ![]() For example, collectibles such as fine art and precious metals are subject to a flat 28% capital gains tax. Some types of investments, while still considered capital assets, are subject to higher federal capital gains tax rates.Now that 15% is looking more like 18.8% if you’re over this mark. For taxpayers with over $250,000 of income for the year, the federal Net Investment Income tax of 3.8% applies to most long-term capital gain transactions, as well as other types of investment income, such as interest and royalties.Instead, this short-term gain is taxed at ordinary income tax rates. If you’ve held the asset a year or less when you sell, then you likely will not. If you hold (own) the asset for more than a year leading up to its sale, you’ll likely receive long-term capital gain treatment. This is important to consider – for example, are you trying to avoid a transaction you won’t be taxed on because your overall income isn’t high enough? Could you shift realizing & recognizing gains across years to reduce overall capital gains tax exposure? For 2021, the federal capital gains rate is 0% if your taxable income is under around $80,000, 15% for taxable income from about $80,000-$500,000, and 20% once you hit around $500,0003. Capital gains aren’t taxed at just one rate. They’re subject to three rates: 0%, 15% and 20% based on your overall income level for the year.While saying capital gains are taxed at 15% isn’t untrue, this quick explanation leaves out so much information that it is unhelpful for most situations. You’ve likely heard that the current federal capital gains rate is 15% which often ends up being lower than tax rates on ordinary income such as wages, self-employed earnings, interest income, distributions from retirement account, etc. Although you will realize a $20,000 loss on the sale, your recognized loss is $0 because there is generally no tax benefit available for selling a personal-use vehicle. You decide to sell the car six years later when it is worth $15,000. You have an endearing, naïve hope that the car will hold its value, yet it does not. For example, you buy a new family car for $35,000. Depending on all kinds of facts related to the transaction and your overall tax situation, you may or may not have a capital loss that can provide a tax benefit. If you sell that investment, you have a realized capital loss. If your investment has decreased in value, you have an unrealized capital loss. Note that this works similarly for capital losses. Why? Because there is a very specific tax law on the books that excludes this realized gain from being considered taxable2. Your recognized gain – the amount subject to tax – is $0. You then sell the house and pocket the profit now you have $350,000 of realized gain. The $350,000 increase is unrealized gain because you haven’t yet sold the house. You and your spouse purchased your primary residence four years ago for $450,000 and now it’s worth $700,000. Let’s look at a scenario where this is not the case. In the Home Depot example, it’s quite possible that your realized and recognized gain are the same. You’ll also see these terms used as you read further here and elsewhere, so let’s take a quick dive in to better understand them. Understanding these three variations of capital gains is important to understanding how your financial decisions impact your taxes. If a realized gain is subject to tax, we say that it’s a recognized gain. Unrealized gains typically are not subject to tax, while realized gains may or may not be subject to tax. Only when you sell the share, do you have a realized capital gain. This increase of $230 is capital gain, specifically it’s unrealized capital gain. You bought one share of Home Depot stock when it was trading at $100 per share and now it’s trading at $330 per share. Your hope is that the value of your investment will increase over time, perhaps even that one day you’ll be able to cash it in ( sales proceeds) for more than you put into it ( cost basis). For your purposes, assume the investment you’re holding is indeed a capital asset subject to capital gains tax treatment unless your tax advisor has informed you otherwise. Shocking, right? Instead, it only tells you what a capital asset is not1. I’d give you a definition of exactly what is considered a capital asset from a tax perspective, but for the fact that the Internal Revenue Code doesn’t define this very important term. Maybe it’s precious metals or cryptocurrency. You have an investment – a capital asset. With all the talk these days about potential changes to capital gains taxes, let’s take a step back and explore what capital gains are and how they’re currently taxed to better understand what related tax law changes could mean for you. ![]()
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