The Basics of Capital Gains Tax

The capital gains tax will be one of the most important tax calculations that you make. It can be complicated, but it is also very important for you to know about it. This blog post will provide an overview of what capital gains are and how they work. We’ll also talk about how to calculate them on your taxes so that you don’t have any surprises come April 15th!

1. What is a Capital Gains Tax?

A capital gain is an increase in the value of your property. When you sell something for more than you paid, that’s a profit and it’s called a capital gain. If you buy the stock at $100 per share and later sell it for $120, then that means that you have made a “profit” or gained money on the transaction.

As you can see, it is very important to know what went into your property in order to accurately calculate how much of a gain or loss there was on the sale. If you are selling something for more than you paid but also have some costs associated with it (such as commissions), then those need to be factored in when doing the calculation.

In the above example, you would have a gain of $20 per share on your stock sale if commissions were factored in. The cost basis will be subtracted from the sales price to get this figure. In our example, it is assumed that each share sold was bought at a different time, so it may not just be one cost basis.

2. How to calculate your capital gains tax?

Your capital gains tax can be calculated in a number of ways, but one simple way to think about it is that the gain you have made should be reduced by any money spent on buying or selling your property. For example, if you bought 100 shares of stock for $50 per share and sold them at $55 per share, then you would have a capital gain of $500 (100 shares x $55 – 100 shares x $50).

However, if you paid commissions on the sale then your cost basis will be adjusted. This is because you did not actually spend that money, it went to someone else instead (in this case the broker you used to buy and sell your stock). In the case of commissions, you would need to adjust your cost basis from $50 per share down to $49.50 per share (100 shares x ($55 – 50)).

In this example, it only makes sense to only reduce the cost basis by half because you did not pay that full amount. Half went toward buying and half went toward selling. You would need to do this for each stock sale you make, which is why it’s important to keep track of your transactions!

It also works the other way around if you sell something for less than what you paid. In that case, subtracting commissions would increase your cost basis and reduce any gains made on those shares sold.

For example, if you bought 100 shares of stock for $50 per share and sold them at $45 per share, then your cost basis would go up to $52.50 (100 x ($45 – 50)). This means that the capital gain on those stocks is only $32.50 (100 x ($55 – 52.50)). If you paid $25 in commissions on those shares, then the capital gain would be reduced further to $17.50 (100 x ($55 – 52.50) – 100 x ($45 – 50) – 25).

Pretty math-heavy and complicated right? Well, that’s why we’re here! We can help make sure that your calculations are done right and make it easy for you to file your taxes.

3. When you will owe taxes on your capital gains ?

You will owe capital gains on your shares sold if you made more than $200 in a single year. If this is the case, then part of what you gain needs to be paid as tax! There are two different rates at which tax must be paid:

Short-term Capital Gains: These apply when an asset was held for less than a year. In this case, you will pay the standard income tax rate on your capital gains (as if it were regular income). For example, someone in the 25% bracket would owe $25 for every $100 of profit they made!

Long-term Capital Gains: These apply when an asset was held for more than a year. In this case, you will pay a lower tax rate on your capital gains based on the following brackets: 0%, 15%, and 20%. This is where things can get complicated!

In order to figure out what bracket you fall into, you need your taxable income from all sources (not just the sale of those shares) as well as the cost basis and holding period for those shares. We can help you figure out what bracket you fall into if this is confusing!

Summary:

In this blog post, we talked about how to determine your capital gains tax, how to calculate it, and when you will owe money on any profits made. Capital Gains Tax is only due if the total gain exceeds $200 in a single year. If that’s not something you want to worry about then we suggest hiring someone who can take care of this for you! Capital gains tax can be a little complicated, but it is important to know what you are owed when filing your taxes.