What You Need To Know About Capital Gains
Capital gains are a fact of life for investors in both long and short-term investments. Even if you do not own stocks and bonds, however, you may owe capital gains. In fact, any capital asset that you sell for more than your "basis" is subject to capital gains tax. Although you may usually prepare your taxes yourself, if capital gains enter the picture, you should consult an accountant. Understanding your tax liability will help you prepare for a possibly painful tax payment come April.
As the IRS would tell you, almost everything you own is a capital asset. You probably already knew that your investments and property counted as these assets, but you may not have realized that your television counts as one as well. If you purchase a television for a bargain basement price and then sell it for several hundred dollars more, you will owe capital gains on the amount of profit you make minus taxes, shipping and handling, and installation/setup fees. If you spend money on fixing up a vintage car, that money can raise your basis. If your item depreciates, however, that amount can be subtracted from the basis amount.
Capital gains on investments certainly require an accountant to properly compute. Equities fall into two categories: long term and short term. Short-term equities are those that are held for less than one year. Long-term equities are taxed at a lower rate because the government wants to encourage investing in companies that help support the economy instead of more dangerous, although sometimes lucrative, high-risk companies that aim for quick profits. Dividends are also taxed differently than capital gains. These distinctions are important and require a level of expertise that you may not have.
Fortunately, you are protected from $250,000 of capital gains when you sell your home. If you are married, the exclusion amount is $500,000, provided that you have owned your home and lived in it for two of the five previous years. This exclusion can be claimed once every two years, which benefits those who move frequently.
Capital gains are a painful fact of life for investors, but they can affect you even if you do not have investments. Simply selling your house or even your antique car can subject you to capital gains tax. If you believe you owe these taxes, consult an accountant well before tax time. Then you will have time to prepare your taxes.