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What You Have to Lose with the Capital Gains Tax

In Accounting & Finances, Business, Taxes on February 10, 2012 by Sufen Wang Tagged: , , , , , , ,

Capital Gains Tax this, Capital Gains Tax that… 
 
We have been hearing this phrase a lot in the presidential debates. But what are those politicians actually arguing about? Don’t shake your head and say “Just another tax I have to pay.” Understanding how the Capital Gains Tax works and what’s at stake will benefit you and your finances in the long run.
 
That nice fridge you just bought from Best Buy is no ordinary refrigerator: it’s also something called a capital asset. The same term applies to your car, your house – even your secret Disney figurine collection. The IRS sums it up pretty well with the explanation that “almost everything you own and use for personal or investment purposes is a capital asset.”
 
Don’t panic yet hoarders. You can own as much stuff as you want without paying a cent of Capital Gains Tax on it. The problem starts when you sell any of that stuff and make more dough than you originally paid for it. For example, you might have purchased a rare book at a garage sale for $5 and you end up selling it for $6,000. Nice job on your $5,995 profit, but the IRS is going to want a piece of the pie too.
 
How much the IRS gets from you depends, in part, upon how long it takes you to sell the asset. A short-term gain is when you sell something for a profit less than a year after its original purchase. Therefore, a long-term gain is when you keep something for at least a year before you sell it. And then, for those people who are really patient, the super-long-term gain is when an asset is held for over five years after the original purchase. 
 
You’re currently better off making long-term investments. For short-term investments, you get charged at the same rate as your income tax – so those in the highest income category get hit hard if they take the fast lane. However, everyone pays a flat rate of 15% for long-term capital gains (except individuals in the 15% income tax range and below, who are now paying 0%). The rates also vary depending on the nature of the asset. Sorry, but everyone is stuck at a 28% long-term rate for collectibles, so you might want to save those figurines for your kids. You can’t avoid paying taxes when you profit from your assets, but the rates aren’t set in stone, so pay attention to what politicians are proposing.
 
 
On the Money,
Sufen Wang
Wang Solutions
 
 
 

2 Responses to “What You Have to Lose with the Capital Gains Tax”

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