Investors pay capital gains taxes when an asset appreciates in value over the original purchase price. According to the Internal Revenue Service (IRS), capital assets include homes, furniture and personal investments such as stocks and bonds. For tax purposes, the original purchase price of the asset is called a basis. An asset may appreciate in value above the basis price, resulting in a capital gain if the asset is sold at the higher price. Conversely, selling an asset whose value depreciates below the basis results in a capital loss.
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) exempts investors whose income is taxed at the 10 percent and 15 percent brackets from paying capital gains taxes. According to this legislation, long-term investments sold from 2008 through 2010 are entirely free of capital gains taxes. Since most U.S. taxpayers are in the 10 percent and 15 percent tax brackets, extending a capital gains tax exemption to this group of taxpayers provides capital gains tax relief for most investors.
Short-term investments are held for less than one year, and their capital gains are taxed according to personal income tax rates. For example, if an investor in the 25 percent tax bracket invests $10,000 in stock and sells after nine months for $11,000, the $1,000 capital gain is taxed at 25 percent. The highest tax rate applied to short-term investments is 35 percent, since this is the highest personal income tax rate applied by the IRS.
Long-term investments are held for longer than a year and subject to capital gains tax, which is lower than the personal income tax rate applied to short-term capital gains. According to the IRS, the maximum capital gains tax rate on long-term investments is 15 percent, as of 2009. However, this rate applies only to taxpayers whose income is taxed at the 25 percent bracket and higher.
Investors in collectibles such as art and coins have to pay capital gains tax if the sale price of an item is higher than its purchase price. Investors in collectibles are subject to tax rates that depend on the income tax bracket of the investor. For example, a higher-income taxpayer in the 35 percent tax bracket is liable for a 15 percent capital gains tax on the sale of the collectible.
The sale of property also generates capital gains that must be reported to the IRS. However, IRS rules indicate that only certain property is subject to capital gains tax. For example, the sale of a home that generates a capital gain for the seller is subject to capital gains tax. However, proceeds from the sale of personal property in the home, such as washing machines, draperies and lawn furniture, are not considered appreciable investments and not subject to capital gains taxes. However, the proceeds from the sale of personal property are subject to personal income tax.
- coins image by Petr Gnuskin from Fotolia.com