You may think that knowing the important facts about capital gains rates is something only high-powered investors need to concern themselves with, but the truth is the capital gains tax will affect most people at least a few times in their financial lives, possibly a bit more. If you sell or are thinking about selling a capital asset, then you should be familiar with the basics of capital gains rates. That goes double for the 2011 and 2012 tax years, when capital gains rates are at their lowest. Here are five important facts about capital gains rates to help you make sound decisions about selling or holding onto your major capital assets.
About Capital Assets
To start with, it’s important to understand exactly what a capital asset is. Virtually everything you own, from your house to your car to that pair of heirloom earrings to the chair you’re sitting on right now is considered a capital asset. Stocks and other investments are also considered capital assets. Simply owning these things, however, doesn’t mean you have to worry about capital gains rates; it’s only when you sell an asset that the capital gains rates come into play.
Gains vs. Losses
When you sell a capital asset, you may need to pay taxes on it depending on whether or not you sold it for a profit of for a loss. If you sell your capital asset for a profit, you may owe taxes on it, depending on how long you’ve owned it and what tax bracket you are in. If you sell an asset at a loss, on the other hand, you could use that loss to offset either other capital gains or your annual income tax. There are limits, however: you can only offset your income by $3,000 ($1,500 if you're married filing separately), but the portion of your capital loss you can’t use can be carried over to the next tax year.
Long vs. Short-Term
One of the most important factors that determines how much the capital gains rate you’ll pay on a profit is how long you’ve owned the asset. If you owned the asset for less than a year, it’s considered a short-term capital gain and you’ll be taxed at the same rate as your other income. If you’ve owned the asset for more than a year, however, it’s then considered a long-term capital gain and therefore taxed at a different and generally lower rate.
By Tax Bracket
When it comes to long-term capital gains rates, the tax bracket at which the rest of your income is taxed will determine the percentage of the profit you’ll owe. In May of 2003, long-term capital gains rates were lowered and that rate has been extended through the 2012 tax year. If you’re in the 25 to 35% tax bracket, you can expect to pay 15% long-term capital gains tax, formerly 20%. If you’re in the 10 to 15% tax bracket, you’ll pay 0% on long-term capital gains, formerly 5%, at least through 2012.
By Asset Type
A few assets are taxed at a higher rate than 15% or 0%. Long-term capital gains from the sale of real estate are taxed at a rate of 25%, while long-term capital gains from the sale of certain types of business stock or from the sale of collectibles, including art, antiques, jewelry, and so on, is taxed at a rate of 28%.