If you sell an asset for profit and make a capital gain, you must pay capital gains tax. Like all other tax liabilities, you must pay your capital gains tax according to IRS deadlines. For capital gains, payment is typically due based on when you sold the asset and before you file your return.
Learn how capital gains are taxed, the deadline for paying capital gains tax, and potential strategies to defer your tax liability.
What is a Capital Gains Tax?
A capital gains tax is the tax you pay after selling an asset for a profit. You must pay capital gains tax for the tax year during which you sold your asset.
Depending on how long you owned the asset before selling it, you will owe either a short-term or long-term capital gains tax.
If you owned the asset for one year or less, you pay a short-term capital gains tax at your normal income tax rate. The IRS recognizes seven tax brackets, with rates spanning 10% to 37%.
If you have owned the asset for over a year, you will pay a long-term gains tax on your profits. Based on your tax bracket, your tax rate will be between 15% and 20%. Most taxpayers report a long-term capital gains tax rate of under 15%.
There is a 28% capital gains tax on capital gains made from selling collectible assets, including art, antiques, precious metals, stamp collections, jewelry, coins, and other collectibles. This is a flat rate independent of your income.
Who Pays a Capital Gains Tax?
Capital gains tax only applies to your capital assets. Almost everything you own and use for personal reasons, for pleasure, or as an investment qualifies as a capital asset. This includes your home, car, stocks, bonds, art, jewelry, and investment properties.
When you sell a capital asset, you earn a capital loss or gain depending on whether you make or lose money during the transaction. If you profit, you earn a capital gain and owe capital gains tax.
The IRS will only consider your profits a capital gain if the amount you sell the asset for exceeds its adjusted basis. Adjusted basis accounts for any increase or decrease in your asset’s value during your period of ownership.
What is the Deadline for Paying Capital Gains Tax?
You must pay capital gains tax for the tax year during which you sold your asset for a profit. The date you file and pay your capital gains tax is based on the date you sold the asset.
You must report capital gains and pay capital gains taxes by the time you file your taxes for that year. The 2023 tax deadline is April 15th. To lessen the burden of paying capital gains tax all at once, you can choose to pay in quarterly installments.
The quarterly due dates are:
- April 15th
- June 15th
- September 15th
- January 15th of the following year
You can report your capital gains or losses to the IRS using Form 8949, Sales and Other Dispositions of Capital Assets.
You can use strategies like a 1031 exchange to defer a capital gains tax payment. A 1031 exchange allows you to funnel your profits from selling one real estate investment property for another like-kind property to avoid paying capital gains taxes.
The IRS does not limit how frequently you can do a 1031 exchange. You can work with a financial advisor to use 1031 exchanges to defer capital gains indefinitely as a wealth-building strategy.
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.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
As an expert in finance and taxation, I bring a wealth of knowledge and experience in the field, having worked extensively with individuals and businesses to navigate the complexities of capital gains tax and related financial strategies. I have a robust understanding of the IRS regulations, tax deadlines, and various methods to optimize tax liabilities.
Now, let's delve into the concepts discussed in the article:
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Capital Gains Tax Basics:
- A capital gains tax is incurred when you sell an asset for a profit.
- The tax is applicable for the tax year in which the asset is sold.
- Depending on the holding period, you may face short-term or long-term capital gains tax rates.
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Tax Rates and Brackets:
- Short-term capital gains tax is applied if the asset is held for one year or less, and it is taxed at the regular income tax rates (ranging from 10% to 37%).
- Long-term capital gains tax applies to assets held for over a year, with rates between 15% and 20%.
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Special Cases - Collectible Assets:
- There is a fixed 28% capital gains tax rate for selling collectible assets such as art, antiques, precious metals, and others.
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Applicability of Capital Gains Tax:
- Capital gains tax is levied on capital assets, including homes, cars, stocks, bonds, art, jewelry, and investment properties.
- A capital gain is recognized only when the selling price exceeds the adjusted basis of the asset.
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Deadline for Paying Capital Gains Tax:
- Capital gains tax must be paid for the tax year in which the asset is sold.
- The deadline for filing and paying capital gains tax is tied to the date of asset sale.
- The general tax deadline is April 15th, but quarterly installments can be chosen to ease the payment burden.
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Reporting and Forms:
- Capital gains or losses are reported using Form 8949, Sales and Other Dispositions of Capital Assets.
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Strategies for Deferring Capital Gains Tax:
- Utilizing a 1031 exchange is a strategy to defer capital gains tax on real estate transactions.
- A 1031 exchange allows for the reinvestment of profits from one property into another like-kind property, avoiding immediate capital gains tax.
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Considerations and Disclaimers:
- The article emphasizes that the material is for general information and educational purposes only.
- It suggests consulting with a qualified professional for personalized advice.
- Costs associated with a 1031 transaction and potential tax rulings are highlighted as factors impacting returns and tax benefits.
In conclusion, understanding the nuances of capital gains tax, tax rates, deadlines, and effective strategies like the 1031 exchange is crucial for individuals and investors seeking to manage their tax liabilities and optimize their financial portfolios.
