Presidential candidate Mitt Romney's tax returns have called attention to capital gains. As you probably now know, capital gains are usually taxed at a lower rate than other types of income -- but they're not just for the super-rich.
Anyone with a capital asset can claim a capital gain when that asset is later sold, according to the Internal Revenue Service. A "capital gain" is how much money you made by selling the asset. (However, if you lost money in the deal, and it's investment property, it's called a "capital loss.")
So what is considered a capital asset? And can you claim the sweet 15% capital-gains tax rate like Mitt Romney does?
The answer depends on many factors, and involves some arithmetic. Here's what the IRS says about capital gains and taxes:
- Almost all of your property, held personally or as an investment, can be considered capital assets.
- When a capital asset is sold, the difference between the sale price and your basis (usually the purchase price) is a capital gain or loss.
- If you held the capital asset for more than a year, your gain or loss is considered "long-term." Otherwise, it's "short-term."
- Subtract your long-term losses from your long-term gains -- that's your net long-term capital gain.
- Add up your short-term capital losses, and any long-term capital losses carried over from last year. Subtract these losses from your net long-term capital gain to get your "net capital gain."
Net capital gains are taxed at different rates for different taxpayers. The maximum rate for most people is 15%, but for those with lower incomes it could be as low as zero. However, some types of net capital gain may be taxed at higher rates of 25% or 28%.
See how complicated it can get? That's why it may be wise to consult a tax attorney about your best options for reporting capital gains on your taxes, even if you're not as rich as Mitt Romney.
- Mitt Romney's tax returns highlight capital gains tax and need for overall tax reform (Chicago Tribune Editorial)
- Ten Important Facts About Capital Gains and Losses (Internal Revenue Service)
- Family Tax Matters: Capital Gains, Filing Status, Deductions and Alimony (FindLaw)