Capital gains are the profits realized from the sale of capital assets such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor. However, mutual fund investors could be charged capital gains on investments in the fund that are sold by the fund during the year.
There are two types of capital gains: long term and short term; each is subject to different tax rates. Long-term gains are profits on assets held longer than 12 months before they are sold. Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. Short-term gains (on assets held for 12 months or less) are taxed as ordinary income at the seller's marginal income tax rate.
The taxable amount of each gain is generally determined by a "cost basis" — in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. (If you received the property by gift or inheritance, different rules apply to determine your starting basis.) In addition, any capital losses incurred in the current tax year or previous years can be used to offset taxes on current-year capital gains. Losses of up to $3,000 a year may be claimed as a tax deduction.
If you have been purchasing shares in a mutual fund over several years and want to sell some holdings, instruct your financial advisor to sell shares that you purchased for the highest amount of money, because this will reduce your capital gains. Also, be sure to specify which shares you are selling so that you can take advantage of the lower rate on long-term gains. Otherwise, the IRS may assume that you are selling shares you have held for a shorter time and tax you using short-term rates.
Capital gains distributions for the prior year are reported to you by Jan. 31, and any taxes owed on gains must be paid by the due date for your income tax return.
Higher-income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers).
This information is prepared by an independent third party, Broadridge Investor Communication Solutions, Inc. and is provided for educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant as financial or investment advice pertaining to your personal situation and does not constitute a recommendation. The selection of appropriate investment, insurance or planning options and/or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors.
Please note that the information provided may include references to concepts that have legal and tax implications. It is not to be construed as legal or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give legal or tax advice.
Securities offered through Waddell & Reed, Inc., Member FINRA/SIPC. Securities are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal. Insurance products are offered through insurance companies with which Waddell & Reed has sales arrangements.
Copyright 2019 by Broadridge Investor Communication Solutions Inc. All Rights Reserved