Mar 15 2014, 6:25pm CDT | by Forbes
When you buy, sell or otherwise dispose of certain kinds of property, the result is a gain or loss for federal income tax purposes. Property subject to these rules is considered a capital asset (yes, giving rise to the terms capital gain and capital loss).
For the most part, capital assets include everything you own and use unless it’s otherwise excluded – so easy, right? It not only includes personal use property like your home and your car but also investment property like stocks and bonds. The rules are largely the same for the two kinds of assets with the primary difference being that you may not deduct a loss from selling personal use property (you can take a loss for the sale of investment property).
To figure the tax treatment of your gain or loss, you have to know a couple of key pieces of information: your basis (most commonly, your purchase price plus adjustments), your selling price and your holding period for the property.
Your holding period is generally defined as the amount of time you held the property. To figure this period, begin counting on the day you acquired the property. The day that you sold or transferred the property is your disposition date. You’ll count through – and including – the disposition date.
If you hold investment property for more than a year, any capital gain or loss is a long-term capital gain or loss. If you hold the property for one year or less, any capital gain or loss is a short-term capital gain or loss.
Here’s an example of how you count days to determine the holding period:
Today is March 15, 2014. If you originally bought investment property on March 15, 2013, and sold it today, your holding period would be one year or less, and gain or loss from the disposition would be short-term. If you sold the same property on tomorrow, March 16, 2014, your holding period would be more than a year, and gain or loss from the disposition would be long-term.
Some specific rules apply, depending on the kind of property:
Other rules may apply to stock rights, property which is traded or bartered, stock dividends and other special circumstances. Consult with your tax or investment professional to help figure out the kind of gain – don’t just make an assumption. This is important because the rate of tax you pay is based on whether the gain is short-term or long-term. The differences between those rates, especially in 2013, can be significant.
Short-term capital gains are taxed at ordinary income rates which means that you pay tax on those gains at the same rate as you report your other taxable income. You can check out the 2013 tax rates here.
Long-term capital gains rates have changed for 2013. Basically, the rate of tax is 0% if you are in the 10% or 15% tax brackets; 15% if are in the 25%, 28%, 33%, or 35% tax brackets; and 20% for taxpayers in the new 39.6% tax bracket. The brackets for capital gains break down like this:
And don’t forget that, beginning in 2013, capital gains items may be subject to an additional 3.8% Medicare tax – called the net investment income tax (or NIIT) – for some high income taxpayers:
For great coverage on the NIIT issue, check out Anthony Nitti’s Definitive Questions and Answers On The New Net Investment Income Tax.
For more in the series, see:
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Source: Forbes Business
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