Understanding Long-Term vs. Short-Term Capital Gains Taxes

You might already be familiar with taxable income and the taxes you pay on your wage. But how do you pay taxes when you sell your home for a profit? That’s when you would enter the territory of capital gains taxes.

You might owe these taxes when you sell assets, such as real estate, collectibles, or stocks, at a profit. On the other hand, capital losses could reduce the tax you owe if you take a loss on a sale. Capital gains tax rules could get complicated, especially if you aren’t familiar with them.

Learning your tax brackets and figuring out your responsibilities to the IRS requires knowing what you owe in capital gains taxes. Let’s break it all down.

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What are capital gains taxes?

Capital gains taxes are a type of taxes that may apply if you make a profit on a capital asset. What exactly is a capital asset? It’s assets you own or purchased for personal use or investment purposes.

Say, for example, that you buy a piece of art and the artist gets famous, so you sell the painting for more than you paid for it. The resulting profit would be a capital gain, subject to capital gains taxes.

The specific amount of profit you’re taxed on equals the difference between the cost basis and the amount you made from the sale. The cost basis usually refers to the asset’s cost, which might equal its purchase price.

However, the basis is adjusted under IRS rules in some cases. This happens, for example, if you inherit property. Your adjusted basis would be the property’s value when you inherited it.

To understand how much your capital gains taxes would be, you need to know your basis, the sale price, and your capital gains tax rate. You’ll also need to know if your gains are considered long-term or short-term capital gains.

What is the difference between long-term vs. short-term capital gains

Your net capital gains are taxed differently depending on the holding period of the asset.

Long-term capital gains

Typically, if you own the asset for more…

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