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Capital Gains Tax Explained (What Is It and How Much It Is)

admin by admin
October 20, 2022
in Tax Rates


As tax season is beginning, a common question from filers is, what is the capital gains tax? Well, to start, the IRS deems taxable income as one of two types: ordinary or capital gain. To help you determine where your tax situation falls, income that is considered ordinary and includes:

  • Salary or hourly wages
  • Interest income
  • Self-employment income (e.g., freelancing or otherwise running your own business)
  • Rental income

On the other hand, capital gains income results from the selling of certain personal items for more than you paid for them. Examples of transactions which can trigger capital gains includes:

  • Stocks sales
  • Mutual fund sales
  • Home sales

There are two kinds of capital transactions: short-term and long-term. Short-term transactions occur if the sale of an asset happens in a year or less after the purchase. Short-term capital gains are taxed the same as ordinary income. However, long-term capital gains occur when the taxpayer owned the asset for more than one year, and are taxed at capital gains tax rates.

At most times in our history including today, top ordinary income tax rates exceed top capital gains tax rates. Consequently, you’d prefer income from a capital gains transaction over the same event triggering ordinary income.

Calculating Capital Gains and Losses

To determine the extent of a capital gain or loss, you simply subtract your cost of the asset you sold from its sales price. If your cost is less than the sales price, you have a capital gain. Your long-term gain will be taxed at 0%, 15%, or 20% depending on your income.

If you have a short-term gain it will be taxed as ordinary income using your marginal tax rate. If your cost exceeds your sales price, you have a capital loss. You can deduct up to $3,000 in capital losses from your income. If your capital losses are more than $3,000 you can carry them forward to the next tax year.

Don’t worry about knowing how to calculate capital gains if you sold personal property. You can come to TurboTax and fully hand your taxes over to a TurboTax Live tax expert available in English and Spanish and get your taxes done from start to finish. All from the comfort of your home.

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