Capital gains are the profits realized from selling assets like stocks, bonds, or property. The capital gains tax is triggered when you sell an asset, not while you hold it. However, mutual fund investors may incur capital gains tax if the fund sells its holdings during the year.
Long-Term vs. Short-Term Gains
- Long-term gains: Profits from assets held for more than 12 months are generally taxed at a lower rate.
- Short-term gains: Profits from assets held for 12 months or less are taxed as ordinary income.
Taxable Amount and Basis
The taxable amount of a capital gain is typically calculated based on the difference between the selling price and the cost basis (purchase price plus adjustments). Capital losses can offset gains, and up to $3,000 of annual losses can be deducted.
Minimizing Capital Gains Tax
- Selling the Right Shares: If you’ve bought mutual fund shares over time, sell those purchased at a higher price to minimize gains.
- Specify Shares: Clearly indicate which shares you’re selling to ensure the correct tax treatment.
Capital Gains Distributions
Mutual funds report capital gains distributions by January 31. Any taxes owed must be paid by the due date of your income tax return.
Medicare Surtax
Higher-income taxpayers may be subject to a 3.8% Medicare surtax on net investment income, including capital gains. This applies to adjusted gross income exceeding $200,000 (single) or $250,000 (married joint filers).
Important Note: This information is for general knowledge only and does not constitute financial advice. Always consult with a tax professional for personalized guidance.
This article is for informational purposes only and does not constitute financial advice. Please consult with a qualified professional for personalized guidance on tax, legal, investment, or retirement matters.
