Capital Gains
Taxable income includes capital gains. A capital gain is the excess of the sales price over the tax basis (usually, the cost) of capital assets, such as corporate stock, land, buildings, etc. Capital losses (where basis is more than sales price) are deductible, but deduction for long term capital losses is limited to the total capital gains for the year, plus up to $3,000 of ordinary income ($1,500 if married filing separately). An individual may exclude $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of the individual's primary residence, subject to certain conditions and limitations.
In determining gain, it is necessary to determine which property is sold and the amount of basis of that property. This may require identification conventions, such as first-in-first-out, for identical properties like shares of stock. Further, tax basis must be allocated among properties purchased together unless they are sold together. Original basis, usually cost paid for the asset, is reduced by deductions for depreciation or loss.
Certain capital gains are deferred; that is, they taxed at a time later than the year of disposition. Gains on property sold for installment payments may be recognized as those payments are received. Gains on property exchanged for like kind property are not recognized, and the tax basis of the new property is based on the tax basis of the old property.
Before 1986 and from 2004 onward, individuals have been subject to a reduced rate of federal tax on long term capital gains. This reduced rate (limited to 15%) applies for regular tax and the Alternative Minimum Tax.
| Ordinary Income Rate | Long-term Capital Gain Rate* | Short-term Capital Gain Rate | Recapture of Depreciation on Long-term Gain of Real Estate | Long-term Gain on Collectibles | Long-term Gain on Certain Small Business Stock |
|---|---|---|---|---|---|
| 10% | 0% | 10% | 10% | 10% | 10% |
| 15% | 0% | 15% | 15% | 15% | 15% |
| 25% | 15% | 25% | 25% | 25% | 25% |
| 28% | 15% | 28% | 25% | 28% | 28% |
| 33% | 15% | 33% | 25% | 28% | 28% |
| 35% | 15% | 35% | 25% | 28% | 28% |
- * Capital gains up to $250,000 ($500,000 if filed jointly) on real estate used as primary residence are exempt.
Read more about this topic: Income Tax In The United States
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