Capital Gains Tax

What Is the Capital Gain Tax?

Capital gains are the profits realized from the sale of capital assets such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor. However, when a mutual fund sells shares of its holdings during the year, mutual fund investors could be charged capital gains. (A fund’s capital gains distribution is not taxable if the fund is held in a tax-deferred account.)

There are two types of capital gains: long term and short term; each is subject to different tax rates. Long-term gains are profits on assets held longer than 12 months before they are sold by the investor. The American Taxpayer Relief Act of 2012 instituted a long-term capital gains tax rate for taxpayers  of up to 20%. Short-term gains (on assets held for 12 months or less) are taxed as ordinary income at the seller’s marginal income tax rate.

Long-term capital gains are taxed at 15 percent for single filers whose taxable incomes range from $39,376 up to $434,550, and for married joint filers whose taxable incomes range from $78,751 up to $488,850. Lower-income filers pay zero tax on long-term capital gains and dividends. Higher-income filers whose taxable incomes exceed $434,550 for single filers or $488,850 for joint filers pay 20 percent.  

The taxable amount of each gain is generally determined by a “cost basis” — in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. (If you received the property by gift or inheritance, different rules apply to determine your start