Understanding Capital Gains and Losses: What You Need to Know

Chris Rock once famously said, “You don’t pay taxes – they take taxes.” That sentiment applies not just to income, but also to capital gains—the profits earned when you sell an investment for more than you originally paid.

Capital gains fall into two categories:

• Short-term capital gains apply to assets held for one year or less and are taxed at ordinary income tax rates.
• Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates.

Important Note: This information is for general awareness and should not be considered tax or legal advice. For personalized guidance, consult a tax or legal professional.

Long-Term vs. Short-Term Capital Gains

Unlike short-term gains, which are taxed as regular income, long-term capital gains benefit from lower tax rates. Here’s a breakdown of the 2024 long-term capital gains tax brackets:

Additional Considerations:

• High-income taxpayers earning over $200,000 (single filers, heads of household) or $250,000 (married filing jointly) may owe an extra 3.8% net investment income tax.
• Gains from collectibles and precious metals are taxed at a maximum rate of 28%, regardless of income level.

Using Capital Losses to Offset Gains

Capital losses can help reduce your tax liability:

• Losses can be used to offset capital gains, potentially lowering your taxable income.
• If losses exceed gains, up to $3,000 can be applied to offset other types of income.
• Any unused losses beyond $3,000 can be carried forward indefinitely until they’re fully utilized.

However, not all capital gain or loss calculations are straightforward. Factors like asset type and purchase details can complicate tax calculations.

Final Thought: Seek Professional Guidance

Tax laws surrounding capital gains and losses can be complex. Before making investment decisions, consult with a tax professional to ensure you're optimizing your tax strategy while staying compliant with IRS regulations.