Are Capital Gains Taxable Income?

person viewing stocks on laptop and phone

In the eyes of the IRS, if it’s income, then yes, it is most likely taxable. But what constitutes a capital gain? In the simplest terms, it is income generated by a capital asset. When people think of capital assets, they’re often thinking about stocks, bonds, and/or mutual funds, but a capital asset can also be a house, a car, furniture, jewelry, or even art. These assets, when sold, can make you money.

How Are Capital Gains Taxed?

The way capital gains are taxed depends on how long you’ve held the capital asset before selling it, known as a holding period. There are two types of holding periods: the short-term and the long-term.

  1. Short-term capital gains are assets that are held less than one year. These are taxed at your regular income tax rate.
  2. Long-term capital gains are any assets held over a year before they are sold. Long-term gains have their own tax rates that are dependent on your filing status and your income. The tax rates are 0%, 15%, and 20%.

What about Capital Losses?

You can use any capital losses to offset your capital gains, thereby lowering the tax you may owe on your capital gains. If capital losses exceed the gains, then you can deduct them from your income. In either case, the most you can deduct in one year is $3,000, but you can carry over additional losses to following years.

There are, of course, always exceptions to the rule, such as gains from the sale of your principal residence.

If you need to know more about your potential capital gains and losses this year, reach out to one of our tax preparers today.

**Please keep in mind: Tax laws and rates often change, and these lists are not exhaustive. Always contact a tax preparer for the most up-to-date information.