Understanding Capital Gains and How They Affect Your Taxes

Capital gains are a critical aspect of investing and financial planning. Whether you’re selling stocks, real estate, or other assets, understanding how capital gains work and their impact on your taxes is essential. Here’s what you need to know:

What Are Capital Gains? Capital gains refer to the profit you make when you sell an asset for more than you paid for it. The difference between the purchase price and the selling price is your capital gain. Capital gains can apply to various assets, including stocks, bonds, real estate, and valuable collectibles.

Short-Term vs. Long-Term Capital Gains: The tax rate on capital gains depends on how long you’ve held the asset before selling it.

• Short-Term Capital Gains: If you sell an asset you’ve held for one year or less, the profit is considered a short-term capital gain and is taxed at your ordinary income tax rate.
• Long-Term Capital Gains: If you’ve held the asset for more than one year, the profit is considered a long-term capital gain, which is usually taxed at a lower rate.

Capital Gains Tax Rates: Long-term capital gains tax rates are generally lower than ordinary income tax rates. The rates vary based on your income level:

• 0%: For individuals with taxable income up to $44,625 (as of 2024).
• 15%: For individuals with taxable income between $44,626 and $492,300.
• 20%: For individuals with taxable income above $492,301.

Offsetting Gains with Losses: If you have capital losses from other investments, you can use them to offset your capital gains. This strategy, known as tax-loss harvesting, can help reduce your overall tax liability.

Exemptions and Special Cases: Certain capital gains may qualify for exemptions or special tax treatment. For example, the sale of a primary residence may qualify for a capital gains exclusion, allowing you to exclude up to $250,000 ($500,000 for married couples) from your taxable gain.

Understanding capital gains and their tax implications is essential for managing your investments and planning your financial future. With the help of Peggy's Family Tax Service, you can stay informed about the differences between short-term and long-term gains, applicable tax rates, and strategies for offsetting gains with losses, enabling you to make informed decisions and optimize your tax situation.