Understanding the Capital Gains Rate Tax

To be successful in investing, thinking long-term is the way to go.  You’ll have a higher chance of earning more money and also have a lower tax rate when you sell. This tax rate, called the capital gains tax rate is a tax charged on all capital gains, or profits made when selling such assets as stocks, bonds, precious metals and property.

Figuring out what capital gains rate you pay depends on several things; including how long you have owned the asset, your income level and what category it falls under.  The long-term capital gains rate is for assets held a year or longer and are thus taxed at a lower rate.  For assets sold before a year, the short-term capital gains tax rate taxes you at your ordinary income tax rate up to 35%. Keep in mind, in additional to the federal capital gains tax rates, your capital gains will be taxed by your state. Most states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income tax rates.

On January 1, 2008 a new zero perect long-term capital gains rate went into effect for indivudals in the 10% and 15% tax brackets. This means any long-term assests they sell will be exempt from capital gains taxes. This zero percent rate is scheduled to expire at the end of 2010, when capital gains rates will increase to at least 10%.  For everyone else in the top four income-tax brackets (25%, 28%, 33% and 35%), the Bush Administration lowered their tax rates to 15%.

While the tax rates of 0% and 15% for long term capital gains has recived the most attention there are 2 other categories to be aware of.  The first is the rate of 25% which applies to part of the gain from selling real estate you deprciated. Real estate investors are allowed to depreciate their rental properties and enjoy the positive cash flow resulting from write-off tax depreciation.  But the IRS is now recouping some of the tax breaks you have been getting via deprciation throughout the years by taxing you at the 25% level.  The second rate is 28% and it applies to small-business stock and collectibles. A qualified small-business stock held for more than five years, is taxed at 28% but only on half of the gains.  This was done to encourage investing in small businesses. Other gains taxed at the 28% include the proceeds from the sale of artwork, gems, precious metals, stamps, coins and even wine collections.

For more information about capital gains rates visit www.irs.gov.