Saturday, June 22, 2024

Capital Gains Under US Tax Law

Who pays capital gains tax ? is the first question that may arise in a taxpayer, and the answer is simple -anyone who gains on selling or transferring a capital asset will have to pay tax on the amount of gain. I know the next question in your mind -“what is a capital asset ?” . Everything you own and use for personal or investment purposes is a capital asset. For example, land, a home, household furnishings, stocks or bonds or even cryptocurrencies held as investments.

Types of capital gains

The capital gains tax in the USA is two types of capital assets- Long Term Capital Assets and Short Term Capital Assets. US Code 1222 defined “Short Term Capital Gains ” as under:

The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.

How do you determine whether your asset is long-term or short-term? Easy, just find out the number of months of the holding period. So, if you hold the asset for more than one year, it is a long-term capital asset. If you hold for less than one year, it is a short-term capital asset. Therefore, if you gain on the sale of a long-term capital asset, it is long-term capital gain; if you sell a short-term capital asset, it is short-term capital gain.

Rate for capital gains tax

The capital gains tax rates differ for the two types of gains described above. The capital gains tax long term is taxed at a much lower rate ( see below) , in some cases at zero rates compared to capital gains tax short term, which is subject to taxation as ordinary income at graduated tax rates.

How capital gains tax is calculated

Capital gain or loss can be found by subtracting the adjusted basis of the capital asset from the amount realized out of the sale. If the number is positive, you have a capital gain; if it’s negative, you have a capital loss that you can use to offset other taxable gains. Use our capital gains calculator

What is an adjusted basis?

The actual cost of property is called the basis of property. However, certain other costs related to buying or producing the property may also be involved. If you spent on the improvement of the property, the original basis in the property is adjusted by adding the cost of the improvement. Similarly, reduce your basis if you take deductions for depreciation or casualty losses. This adjustment of basis is called the adjusted basis of property.

The capital gains tax for real estate is thus sale consideration minus adjusted basis in property. If the net amount is negative, it is a capital loss that can be utilized for adjusting other gains. You can plan capital gains tax avoidance as per law. You can save on capital gains tax when selling a house. Section 121 of US Code 26 provides that capital gains on the sale of a primary residence shall be tax-free up to  $ 2,50,000; apart from under certain conditions, you can claim exemption on long-term capital gains earned on the sale of a residential house. There are various ways in which you can defer capital gains. For example, by investing in a qualified opportunity fund (QOF) to defer capital gains

Capital gains tax brackets

2019 Short-Term Capital Gains Tax Brackets

Tax Bracket/RateSingleMarried Filing JointlyHead of Household
10%$0 – $9,700$0 – $19,400$0 – $13,850
12%$9,701 – $39,475$19,401 – $78,950$13,851 – $52,850
22%$39,476 – $84,200$78,951 – $168,400$52,851 – $84,200
24%$84,201 – $160,725$168,401 – $321,450$84,201 – $160,700
32%$160,726 – $204,100$321,451 – $408,200$160,701 – $204,100
35%$204,101 – $510,300$408,201 – $612,350$204,101 – $510,300

2019 Long-Term Capital Gains Rates

0%$0 – $39,375$0 – $78,750$0 – $52,750
15%$39,376 – $434,550$78,751 – $488,850$52,751 – $461,700

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