Weekend Reading: Capital Gains Tax 101: Basic Rules Investors and Others Need to Know

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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When it comes to your investments, the capital gains tax applies to more accounts, transactions and profits than you might realize.


As such, it’s an important part of your overall tax plan, and so is understanding the potential tax consequences it can cause.

What are capital gains? As stated in the article, capital gains are “the profit you make from selling or trading a ‘capital asset’.” This might include investment property, such as stocks, bonds, real estate, etc. And, it also includes property for personal use, such as your car, house or home furnishings. To further complicate things, however, there are special rules that can affect the classification or treatment of your property as a capital asset. For instance, selling frequently to customers, selling property to a relative or the sale of intellectual property (patent, model, etc.), all come with unique tax requirements.

When are they taxed, and how are they calculated? Capital gains are taxed when you sell a capital asset. Therefore, your capital assets can continue to increase in value without tax consequence as long as you hold onto them. Additionally, your capital gain is “generally equal to the value that you receive when you sell or exchange a capital asset minus your "basis" (what you paid) in the asset.” But again, modified rules can apply to this calculation based on unique situations. You must also take into consideration your capital gains tax rate, state and local income taxes and your capital asset holding period when you sell.

Tax-loss harvesting: If you lose money on investments, tax-loss harvesting can be a strategy employed to offset capital gains with capital losses. In doing so, you only pay taxes on your net capital gains, but you must follow a specific sequence on short-term losses/short-term gains and long-term losses/long-term gains. Much like with all other aspects relating to capital gains, the tax component here is complicated, and requires a sophisticated tax strategy.

Prioritize a tax strategy: Where the tax code is most complex is often where we find the biggest opportunities. As such, capital gains rules may be one of those areas you have overlooked.