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Tax Facts on Capital Gains and Losses
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Understanding capital gains and losses is essential for effective tax planning and compliance. Here are some key tax facts regarding capital gains and losses:
What Are Capital Gains and Losses?
- Capital Gains: These occur when you sell an asset for more than its purchase price. For example, if you bought stock for $1,000 and sold it for $1,500, you would have a capital gain of $500.
- Capital Losses: These occur when you sell an asset for less than its purchase price. Using the same example, if you sold stock for $800, you would have a capital loss of $200.
Types of Capital Gains
- Short-Term Capital Gains: Gains from assets held for one year or less are considered short-term and are taxed at your ordinary income tax rates.
- Long-Term Capital Gains: Gains from assets held for more than one year are considered long-term and typically taxed at reduced rates (0%, 15%, or 20%) based on your income level.
Tax Rates on Capital Gains
- Long-Term Capital Gains Rates:
- 0%: For single filers with taxable income up to $44,625 (2023).
- 15%: For single filers with taxable income between $44,626 and $492,300.
- 20%: For single filers with taxable income over $492,300.
- (Rates vary for married couples and head-of-household filers.)
- Net Investment Income Tax (NIIT): High-income earners may also be subject to a 3.8% NIIT on capital gains.
Offsetting Gains and Losses
- Netting Gains and Losses: You can offset capital gains with capital losses. Short-term and long-term gains must be netted separately. For example, if you have a $1,000 short-term gain and a $400 short-term loss, you only pay tax on the net short-term gain of $600.
- Carryover of Losses: If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) against other income, such as wages. Any remaining losses can be carried forward to future tax years.
Special Considerations
- Primary Residence Exclusion: If you sell your primary home, you may be able to exclude up to $250,000 ($500,000 for married couples) of capital gains from taxation, provided you meet certain ownership and use requirements.
- Inherited Assets: Inherited assets generally receive a step-up in basis, meaning their value is adjusted to the fair market value at the time of the decedent's death, potentially reducing capital gains when sold.
- Like-Kind Exchange: Certain real estate transactions may qualify for a like-kind exchange, allowing you to defer capital gains taxes if you reinvest the proceeds into a similar property.
Reporting Requirements
- Form 8949 and Schedule D: Individuals must report capital gains and losses on Form 8949 and summarize the totals on Schedule D of their tax return.
- Brokerage Statements: Most brokers will provide a Form 1099-B, which details your capital gains and losses for the year. Ensure that this information is accurate when filing your taxes.
Record-Keeping
- Keep Detailed Records: Maintain records of your purchase price, dates of acquisition and sale, and any associated costs (like commissions or improvements) that can affect your asset's basis for accurate reporting.
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