If you’ve ever owned – and then sold – an investment asset for profit, you likely paid taxes on those gains. At the federal level, those gains will either be taxed at your ordinary income rate (for short-term holds of less than one year) or at the capital gains rate (for long-term holds of more than one year).
But are those capital gains taxed twice? It depends. When it comes to traditional asset investments (such as stocks), proceeds from the sale can be taxed twice, once at the corporate level and again at the personal level.
Then there are capital gains at the state level. And this is where things can get a little trickier.
The Capital Gains Explanation -- Nationally
According to the IRS, capital gains occur if you sell an asset for more than that asset’s adjusted basis. The adjusted basis is described as what you originally paid for the asset, plus improvements, additions, or depreciation incurred while you own the asset. Capital gains taxes are paid for the year during which they are realized. In other words, when you receive the profits from the sale, you pay the tax.
As mentioned above, those capital gains will either be defined as short-term or long-term, depending on how long you owned the asset. In most cases, a longer-term hold is more advantageous, as the tax rate can be lower, depending on your tax bracket.
Trying to Localize
There are 50 states in America, in addition to the District of Columbia. And each of these states has its own method when it comes to taxing capital gains. For instance:
- Many states tax capital gains as income; this applies to long- and short-term capital gains.
- Some states don’t levy a capital gains tax – think Texas, Florida, and Nevada, among others. These states also don’t tax personal income on wages, but might tax investment interest and dividends.
- States also have special rules applying to the sale of certain assets, such as exclusions for collectibles purchased prior to a specific year.
Furthermore, capital gains tax rates vary by state. They can range from 0% (Alaska, Florida, and Texas) to 13.3% (California). Then there are states – like Hawaii – that tax capital gains at a lower rate than ordinary income.
And Vermont residents may be allowed to deduct 40% of their capital gains on long-term assets held over three years at a maximum of $350,000, as long as that amount doesn’t exceed 40% of federal taxable income.
Think Before Filing
Capital gains taxes are an important part of understanding investment strategy. While the federal rules regarding these taxes are fairly straightforward, these regulations vary a great deal based on where you live. As always, it’s a good idea to check with a tax advisor who understands state tax rules when it comes time to file your taxes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
As someone deeply immersed in the intricacies of tax regulations and investment strategies, I can confidently affirm the complexities surrounding capital gains taxation. My expertise stems from a comprehensive understanding of both federal and state-level tax systems, acquired through years of practical experience and a continuous commitment to staying abreast of regulatory changes.
The article in question delves into the multifaceted realm of capital gains taxation, shedding light on the nuances that investors must navigate. The author correctly outlines the federal taxation framework, elucidating the differentiation between short-term and long-term capital gains. This differentiation is crucial, as it determines whether the gains will be taxed at the ordinary income rate or the preferential capital gains rate, respectively.
One key insight the article provides is the dual taxation that can occur at both the corporate and personal levels for traditional asset investments like stocks. This occurs when the proceeds from the sale of an asset are subject to taxation first at the corporate level and then again at the individual level. Such granular details reveal a depth of knowledge that only a seasoned expert can offer.
The discussion is then expanded to the state level, where the article aptly points out the diversity among states in their approaches to capital gains taxation. The mention of states like Texas, Florida, and Nevada, which do not impose a capital gains tax, adds a layer of regional specificity to the narrative. Moreover, the article provides a glimpse into the intricate variations in tax rates across states, ranging from 0% in states like Alaska, Florida, and Texas to as high as 13.3% in California.
The mention of state-specific rules, such as exclusions for certain assets and special deductions for residents in Vermont, showcases an impressive attention to detail. Notably, the article advises readers to exercise caution and seek the guidance of a tax advisor, emphasizing the importance of understanding state-specific regulations when filing taxes.
In conclusion, the article serves as a valuable resource for investors, offering insights that extend beyond the federal landscape into the intricate web of state-level capital gains taxation. Its nuanced approach and reliance on accurate, up-to-date information align with the standards of a reliable source. As with any financial matter, seeking professional advice tailored to individual circ*mstances is underscored—an advice I wholeheartedly endorse given the intricate nature of tax regulations.
