5 Things You Should Know about Capital Gains Tax (2024)

Key Takeaways

• Capital gains tax may apply to any asset you sell, whether it is an investment or something for personal use.
• If you sell something for more than your "cost basis" of the item, then the difference is a capital gain, and you’ll need to report that gain on your taxes.
• Depending on the real estate market, you might realize a huge capital gain on a sale of your home. The tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet certain requirements.
• How your gain is taxed depends on how long you owned the asset before selling—short-term gains are typically taxed at a higher rate than long-term gains.

In most cases, your home has an exemption

The single biggest asset many people have is their home, and depending on the real estate market, a homeowner might realize a huge capital gain on a sale. The good news is that the tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet all three conditions:

1. You owned the home for a total of at least two years.
2. You used the home as your primary residence for a total of at least two years in last five-years before the sale.
3. You haven't excluded the gain from another home sale in the two-year period before the sale.

If you meet these conditions, you can exclude up to $250,000 of your gain if you're filing as single, head of household, or married filing separately and $500,000 if you're married filing jointly.

TurboTax Tip:

If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income for the tax year and carry the excess over to future years.

Length of ownership matters

If you sell an asset after owning it for more than a year, any gain you have is typically a "long-term" capital gain. If you sell an asset you've owned for a year or less, though, it's typically a "short-term" capital gain. How your gain is taxed depends on how long you owned the asset before selling.

• The tax bite from short-term gains is significantly larger than that from long-term gains - as much as 10-20% higher.
• This difference in tax treatment is one of the advantages a "buy-and-hold" investment strategy has over a strategy that involves frequent buying and selling, as in day trading.
• People in the lowest tax brackets usually don't have to pay any tax on long-term capital gains. The difference between short and long term, then, can literally be the difference between taxes and no taxes.

Capital losses can offset capital gains

As anyone with much investment experience can tell you, things don't always go up in value. They go down, too. If you sell an investment asset for less than its cost basis, you have a capital loss. Capital losses from investments—but not from the sale of personal property—can typically be used to offset capital gains. For example:

• If you have $50,000 in long-term gains from the sale of one stock, but $20,000 in long-term losses from the sale of another, then you may only be taxed on $30,000 worth of long-term capital gains.
  • $50,000 - $20,000 = $30,000 long-term capital gains

If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in capital losses, this excess amount can be carried forward to future years to similarly offset capital gains or other income in those years.

Business income isn't a capital gain

If you operate a business that buys and sells items, your gains from such sales will be considered—and taxed as—business income rather than capital gains.

For example, many people buy items at antique stores and garage sales and then resell them in online auctions. Do this in a businesslike manner and with the intention of making a profit, and the IRS will view it as a business.

• The money you pay out for items is a business expense.
• The money you receive is business revenue.
• The difference between them is business income, subject to self-employment taxes.