• Wealth Management Division

What Exactly Is a Capital Gain Tax?

Profits earned through the selling of capital assets such as stocks, bonds, and real estate are referred to as capital gains. The capital gain tax is triggered only when an asset is sold, not while an investor holds the asset. However, when a mutual fund sells shares it was holding during the year, mutual fund investors may be taxed for capital gains. If a fund is held in a tax-deferred account, its capital gains payout is not taxable.

There are two sorts of capital gains: long-term and short-term, and each is taxed at a different rate. Long-term gains are profits on assets kept for more than a year before being sold by the investor. The American Taxpayer Relief Act of 2012 imposed a long-term capital gains tax rate of up to 20% on taxpayers. Short-term gains on assets held for less than a year are taxed as regular income at the seller's marginal tax rate. The Tax Cuts and Jobs Act, which was signed into law in December 2017, introduced "breakpoints" for tax rates. These breakpoints would be updated for inflation in the future.

The taxable amount of each gain is normally determined by a "cost basis," which is the initial purchase price modified for extra renovations or investments, taxes paid on dividends, certain fees, and asset depreciation. If you acquired the property as a gift or inheritance, the standards for determining your beginning basis are different. Furthermore, any capital losses generated in the current or previous tax years can be used to balance taxes on current-year capital gains. Losses of up to $3,000 per year for married filing jointly and $1,500 for married filing separately may be claimed as a tax deduction.

If you have been buying shares in a mutual fund for several years and wish to sell some, tell your financial advisor to sell first the shares you bought at the highest price, as this will lower your capital gains. Also, identify which shares you are selling so that you may benefit from the reduced tax rate on long-term profits. Otherwise, the IRS may presume you are selling shares held for a shorter period of time and tax you at short-term rates.

Capital gains distributions for the previous year are reported to you by January 31, and any taxes payable on gains are due by the due date of your income tax return. Higher-income taxpayers should be advised that if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married filing jointly), they may be liable to an extra 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains).


The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investment goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.

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