Investing in or selling a stock is exciting to think about, but before you move forward, it’s essential that you understand how capital gains tax is calculated. Our team at Founder’s CPA has compiled three helpful takeaways to give you the confidence to navigate this important topic.
Definition of capital gains taxes
When you sell something for more than you paid to acquire it, it may be subject to a capital gains tax. This is typical for investments, but it can also apply to personal property or something that you use for personal use.
1. In the majority of cases, your home has an exemption
Your home is likely the single largest financial investment that you’ll make in your life. Depending on the state of the current market, you might sell your home and realize a huge capital gain. To do so, you’ll need to meet these conditions:
- You need to have owned the home for a minimum of two years
- You need to have used the home as your primary residence for at least two of the last five years before the sale
- You haven’t excluded the gain from another home sale in the two-year period before selling
2. Ownership length matters
How long you own the asset will also impact how the capital gains tax is calculated. Anyone involved in investments knows that not everything goes up in value. In the case that you sell an investment asset for less than what it’s currently worth, this is a capital loss. If you have a capital loss from an investment, but not from selling your personal property, this can typically be used to offset a capital gain.
In the case that you have a loss that exceeds a gain, you might be able to use it to offset up to $3,000 of other income. If you have over $3,000 in capital losses, you can carry this amount forward to help offset capital gains in future years.
3. Business income isn’t a capital gain
If you have a business that buys and sells items, your gains will be considered and taxed as business income as opposed to a capital gain. For example, there are many people who go to garage sales and antique stores to purchase items and turn around and sell them for profit at a higher auction. If you do this repeatedly with the intention of making a profit, the IRS will view it as a business.
Working with a tax professional
As you can tell, there are many nuances to understanding how capital gains tax is calculated. To confidently navigate these types of tax situations, it’s best to work with a professional. Contact our team at Founder’s CPA to see how we can assist you!
