How Are Capital Gains Taxed?
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Earning a return on a stock market or real estate investment can help you meet your financial goals faster than you’d planned, but it also comes with a down side.

Before you start spending that gain, plan for the taxes you’ll need to pay on the money you’ve made.

How Capital Gains Are Taxed

Any time you sell a capital asset — such as a stock, bond, or piece of real estate — for more than you paid for it or for more than its value when you acquired it, you've made a capital gain. Short-term capital gains are earnings made on assets held for one year or less; long-term capital gains are earnings made on assets held for longer than one year. Tax law requires you to report these earnings to the IRS and pay the appropriate capital gains tax.

The good news: The capital gains tax rate you pay may be lower than the tax rate you pay on ordinary income.

Reducing Your Capital Gains Tax Burden

The capital gain on the sale of an asset is the sale price minus the price you paid to buy the asset. There are ways to reduce your capital gains tax burden. One option: Hold your assets for longer than a year if doing so would result in paying a lower long-term capital gains tax rate rather than paying the higher taxes on short-term capital gains. For example, if you make home improvements such as painting, refinishing floors, installing new appliances, etc., the value of your home will increase while your capital gains decrease as you continue to own the home, resulting in a lower capital gains tax as well.

This may not work for all capital gains, and holding the asset for two years may be required in certain situations like the sale of a home. However, you will want to examine the financial ramifications of holding assets for longer than originally planned, as some may depreciate in value over time.

You may also qualify for tax deductions if any of your capital assets decrease in value to the point that your capital losses exceed your capital gains. There is a deduction limit of $3,000 per year or $1,500 if you are married and filing separately. However, the IRS allows you to carry over losses that exceed the limit to the following year and treat them as if they were incurred in that year.

If you’re facing a high capital gains tax bill and possess other capital assets that have lost value and are unlikely to recover that value over time, you might consider selling those assets at a loss. That’s because a net capital loss (or a reduced net capital gain) could lower your capital gains tax bill. Speak with your tax professional and wealth advisor to discuss your options.

Charitable donations of long-term capital assets may also decrease your capital gains tax burden. For example, donating stock that has gained value over time — rather than cashing out and donating the equivalent amount — can lead to savings at tax time. You may be able to take a tax deduction for the full market value of the securities up to 30 percent of your adjusted gross income. If you haven’t realized any gain, you can also avoid having to pay capital gains tax.

To make the most of your smart investment, take a big picture view of your portfolio and tax liabilities before you decide to cash in. Your tax professional can help you understand your earnings and make the right call. Review these tips for reducing your capital gains tax burden and visit the Regions Tax Center to learn more.

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