Whenever you sell an investment at a profit, you will (in most cases) owe the IRS a tax known as a capital gains tax.
This is true for most investments, including mutual funds, bonds, options, collectibles, your home, or business.
Capital gains are the amount by which an asset's selling price exceeds its initial purchase price.
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The limit is $250,000 for single taxpayers and $500,000 for married couples filing jointly.
The IRS divides capital gains into two distinct categories, with each having different tax consequences.
Long-term capital gains are gains on investments held for more than a year, while short-term capital gains are gains realized on investments that are held for a year or less.
Short-term capital gains are taxed according to your income tax bracket and long-term gains are taxed at 15% if you are in the 25% or higher tax bracket, and 20% if you are in the 39.6% bracket.
An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold; the gain equals the difference between the purchase price and the selling price.
The term capital gain is often used to mean realized capital gain.
The opposite of a capital gain is a capital loss, which occurs when the selling price of an investment is less than the purchase price.
In relation to your home, you may be able to exclude the gains from the sale of your primary residence (the one you spend most of your time in) if you have lived in it for at least two consecutive years.
In other words, long-term gains are subject to lower tax rates because the IRS wants to encourage long-term investing.
The cost basis of your investment, the amount that was originally paid for the investment, can be determined by several methods: To determine the capital gains tax on an investment, subtract the amount paid for the investment, including any broker commissions, from the sales price to arrive at the capital gain or loss.
Then take this amount and multiply it by the appropriate tax rate, which will give you the tax owed on the sale of your investment.