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Blog » Capital Gains Tax in the USA Tax Preparation

Capital Gains Tax in the USA Tax Preparation

Last updated: 07 Feb, 2024 By | 6 Minutes Read


When you trade something for an additional gain than you spent to acquire it, a capital gain occurs. It is prominent in investments, but is applicable on personal property too. Suppose, you buy a second owner car for $4000 and sell it for $5000, there is a $1000 capital gain. Let’s dive into basic facts about capital gains that every taxpayer should understand over the financial year.

Capital Gains are for everyone:

Capital gains tax (CGT) is applicable to anyone who sells a capital asset. As per IRS everything owned by an individual is a capital asset. If anything is sold more than ‘basis’ in the item, differential is a capital gain and these gains are to be reported on an individual’s taxes. Apart from amount paid to acquire the item, it also includes other costs paid to acquire it. For instance:

  • Sales tax, excise, fees and other taxes
  • Shipping charges, installation and set up charges
  • Improvements made to increase value of an asset can be added to basis. Basis can be reduced by depreciation of an asset.

Home is Exempted in Most Cases:

The major asset to people is their home and a homeowner might be able to realize a huge capital gain on sale, depending upon the real estate scenario of tax preparation. On the bright side, tax code allows owners to exclude some or all of capital gains tax. Even if one is electing an outsource tax preparation service, there exist some necessary conditions to avail the CGT benefits that are:

  • In the five- year period you must own the home for at least two years
  • In the same five- year period the home was used as primary residence for at least two years
  • No other gain has been excluded from another home sale in the two year period

Provided these conditions are met, you can exclude up to $250,000 of your gain in case you are single or $500,000 in case you are married and filing jointly.

Length of Ownership:

If an asset is sold after being owned for more than a year, the gain you have is “long term” capital gain. If it is sold before a year or less, it is “short term” capital gain. Short- term gains tend to have a larger tax bite as compared to long- term gains. You pay 10-20 percent more on investments if you’ve held them for less than a year.

Losses in Capital Offset Capital Gains:

When something is sold for less than its basis, it is a capital loss. Apart from personal property, capital losses from investments can offset capital gains. Say you have $30,000 in long term gains from sale of a stock, but $10,000 in long- term losses from another sale, then you may be taxed on $20,000 worth of long- term capital gains only.

Business Income is not Capital Gain:

  • If you buy and sell items for profit in a business, these gains will be taxed under business income rather than capital gains. For instance, if you buy something from antique store or local sales and trade them online for a profit, the IRS will consider it as a business.
  • The money paid out for these items is considered a business expense. The difference between money paid out and business revenue is measured as income and subject to same taxes as income from employment.

CGT Implications on Gifted Properties:

When a property is transferred before the death of original owner, it is called a gift. There are different tax consequences in case of gifted property.

How Capital Gains are Calculated on Gift Property:

  • Capital gains or losses on property received are evaluated based on original owner’s cost basis. The recipient receives property cost basis when the property was gifted to him/her. He/she also received the donor’s holding period in the property for concluding the case of short- term or long- term gain.
  • Recipient’s capital gain or loss on the gifted property will be determined by subtracting adjusted cost basis from the selling price.

When you receive a property as a gift, consider living in the property for a period of two years. This qualifies you for capital gains exemption of up to $500,000 on sale of a primary address.

Tax preparation hindering your business growth? Consider outsourcing tax preparation as it brings more efficiency to the process and lets you have time to focus on core business activities. Get in touch with Cogneesol for the same. Contact now, at +1 646-688-2821 or email us at [email protected].