Capital Gains Tax Q&A

January 18, 2010

What is the Capital Gains Tax & What Financial Events Trigger the Tax?

A capital gains tax is a tax that is charged to both individuals and corporations on the profits of the sale of investments and assets. In the United States capital gains tax is calculated on the net profits of the sales.

This means that a person may have fifty thousand dollars profit from the sale of a particular stock, but also has a loss of twenty thousand dollars from the sale of a different stock; this individual would have to pay capital gains tax on only on the difference, in this case thirty thousand dollars.

It is also important to note that capital gains are only due on the profits from the “sale”. This means that just because a particular stock that you may hold tripled in value over the course of the year, you do not have to pay taxes on the increase in value unless you sell your shares, cash in and “realize” a profit. The most common financial transactions that cause you to have to pay capital gains tax are the sale of stocks, bonds, properties.

Short Term Capital gains vs. Long Term Capital Gains

Short term gains and long term gains refer to the length of time that the assets were owned before they were sold. This is important because the tax rates are different depending on this length of time.

The tax rate in the United States on long term gains (any asset that has been owned for longer than one years time before being sold) is around fifteen to twenty percent. The tax rate for short term gains on the other hand is higher, and is set at the ordinary income tax rate. Please keep in mind that these tax rates can vary greatly, depending on an individuals tax bracket.

How to Reduce Capital Gains Tax?

How can you reduce capital gains tax, in some instances this is the million dollar question. There are various ways you can can legally reduce or defer capital gains tax, here are just a few examples with brief descriptions:

  • Tax Loss Harvesting: Using the losses in taxable accounts to reduce taxes due.
  • Charitable Trust: Donating to charitable organizations in order to offset ones taxes due.
  • Installment or Structured Sale: Taking payments for a sale over a number years spreads the capital gains across the years that payments are received.
  • 1031 Exchange: For real estate only, when you sell and make a profit then subsequently by another similar property.

What Software Can Calculate Capital Gains Tax?

Software programs that can simplify and automate the process of calculating capital gains can help reduce errors and make the process simpler. Below is a list of some popular software applications that will assist you in this process.

This list is made up of applications that can link up with the major brokerage firms and download the required data, report the data onto the required IRS form Schedule-D, and export the data to your accountant or tax preparation software such as TurboTax and TaxCut.

You will be hard pressed to find someone that wants to pay more taxes than are due. Your capital gains are yours; you have earned them. Unfortunately you’ll have to pay taxes on them; hopefully these questions and answers will help a little as you calculate your capital gains tax.




Debbie Dragon is a full-time writer who has been covering personal finance online for almost 9 years.

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