Capital gains can be earned on stocks, bonds, mutual funds, works of art, real estate, baseball cards, bottles of wine, or virtually anything else that can be considered an investment.
Taxation of Capital Gains
The tax rules for capital gains vary depending upon the specific investment. For instance, capital gains on gold or silver is taxed as a collectible, which has a higher rate (28% at the time of publication) than capital gains on stocks (15% for long-term holdings that are sold). There are generally three considerations when it comes to determining the tax treatment of your capital gains. These are:1. What is the tax treatment for the underlying asset on capital gains? As mentioned earlier, gold and silver capital gains are taxed at higher rates than the capital gains paid on stocks or bonds. Likewise, the tax rules provide huge lifetime capital gains exemptions for homeowners that sell their house at a profit (which is technically a capital gains profit because it comes from selling an asset that was purchased at a lower price). We talked about this in-depth in Capital Gains Tax Holding Periods, which provided you with examples and more information on how the length of time you hold an investment can determine, in part, the total capital gains taxes owed.
2. What is the capital gains tax holding period? This is the length of time you held the investment. To encourage long-term investing, the government often provides lower tax rates on assets that are held longer than a certain period of time such as 1 year or 5 years.
3. Are the capital gains being offset by capital losses? Most of the time, you can offset any capital gains taxes you would owe by deducting capital losses on similar investments. For instance, if you had a $100,000 capital gain on one stock and a $30,000 capital loss on another stock, you might be able to pay taxes on the net capital gains of $70,000, saving you money.
