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 before you start spending that big 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 then 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

There are ways to potentially reduce your capital gains tax burden. One option is to consider holding your assets for longer than one year if doing so would result in paying a lower, long-term capital gains tax rate rather than paying taxes on short-term capital gains at the ordinary income tax rate. (This may not work for all capital gains, and two years may be required in certain situations like the sale of a home.) However, you will want to first 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 some of the capital assets you own have lost value such that your capital losses exceed your capital gains. There's a limit of $3,000 per year that you can deduct, 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.

This means that if you’re facing a high capital gains tax bill and are holding other capital assets that have lost value and are unlikely to recover and increase in 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 to discuss your options.

Charitable donations of capital assets held more than one year may also decrease your capital gains tax burden. For example, donating stock that has gained over time — rather than cashing out and donating the equivalent amount — can lead to savings at tax time. Depending on the circumstances, 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. Visit the Regions Tax Center to learn more, and check out our slideshow with tips to reduce your capital gains tax burden.

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This information is general in nature and is provided for educational purposes only. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation.