Capital gains taxes are paid on the amount of profit you make on your investments. Almost everything you own is considered a capital asset and when you sell it, you may have to pay capital gains. You may also qualify for capital loss deductions if you have lost money on the investment. The amount you paid for the asset is called its basis and the gain is computed by subtracting the basis from the amount you earned when you sell it.
Capital gains taxes are for long-term investments, those held for at least a year. If you hold an investment for less than a year, you will pay the short-term rate. This is the same rate your taxes are based on and can be as high as 35 percent.
All capital gains must be reported but not everyone will have to pay the tax. The capital gains tax is income sensitive and there are some exclusions that you are not required to pay capital gains on. The basic tax rate for capital gains, if you qualify to pay them, is 15 percent. Some special conditions may result in a tax rate of 25 to 28 percent.
If you fall in the lowest two tax brackets, the 10 percent and 15 percent tax brackets, your capital gains will be taxed at 10 percent. Even if your income is higher, your income is what determines how much you pay in capital gains. If you are in the 25 percent or 35 percent tax bracket, your capital gains will be taxed at 20 percent.
If you are selling property you have depreciated, you may have to pay 25 percent in capital gains. Since you've gotten tax breaks on the depreciation, the IRS taxes you at a higher rate to recoup some of those tax breaks.
If you own small-business stock for more than five years, you will have to pay 28 percent on half of the capital gains realized at the sale. The other half can be excluded. If you are selling collectibles, such as coins, stamps, art, and other expensive collectible items, you will pay 28 percent on the capital gains.