Here are ten important things to know about capital gains and losses:
1. Definition: A capital gain occurs when you sell an asset (like stocks, real estate, or other investments) for more than you paid for it. Conversely, a capital loss occurs when you sell an asset for less than your purchase price.
2. Types of Gains: There are two types of capital gains: short-term and long-term. Short-term capital gains arise from assets held for one year or less, and they are taxed at ordinary income rates. Long-term capital gains come from assets held for more than one year and are typically taxed at lower rates.
3. Tax Rates: Long-term capital gains tax rates can vary based on your income level and can be 0%, 15%, or 20% in the U.S. Short-term gains are taxed at your ordinary income tax rate, which can be significantly higher.
4. Offsetting Gains with Losses: You can offset capital gains with capital losses to reduce your taxable income. If your losses exceed your gains, you can use the excess loss to offset up to $3,000 ($1,500 if married filing separately) of other income, with any remaining losses carried forward to future years.
5. Wash Sale Rule: If you sell a security at a loss and then repurchase the same or substantially identical security within 30 days before or after the sale, the IRS may disallow the loss for tax purposes. This is known as the wash sale rule.
6. Exclusions for Primary Residence: If you sell your primary home, you may be eligible for a capital gains exclusion. If you meet certain criteria, you can exclude up to $250,000 of gain ($500,000 for married couples) from the sale from taxation.
7. Investment Accounts: The tax treatment of capital gains can differ based on the type of account in which the assets are held. For example, assets in tax-advantaged accounts (like IRAs and 401(k)s) may not incur taxes until withdrawal.
8. Holding Period Considerations: Planning your investment strategy around the holding period of assets can influence your tax situation. For example, holding onto an investment for longer than a year can significantly reduce your tax liability due to the lower long-term capital gains tax rates.
9. State Taxes: In addition to federal taxes, many states impose their own taxes on capital gains. The rates and rules can vary significantly, so it's important to be aware of your state's tax laws.
10. Record Keeping: Proper record-keeping is essential for calculating capital gains and losses. Keep track of purchase prices, sale prices, dates of transactions, and any associated costs (like brokerage fees) that could affect your calculations.
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