Often times our Denver tax and Denver accounting clients assume capital gains are a tax that only apply to those that are wealthy.
But truthfully, anytime you invest in anything beyond your 401K plan or IRA, you have the potentional to realize capital gains.
Capital gains simply refer to the earnings on an investment that an investor receives when he or she sells it at a greater value than what was paid for it. Meaning, you don't need to be wealthy to realize a capital gain. You could sell a home for $200,000 but you had purchased the home for $175,000. You have realized capital gains of $25,000.
There are short-term and long-term capital gains, and they are both taxable. The rate at which you are taxed all depends on when you sell your item - whether it be a home, stock, or bond, for example.
If you buy something and then sell it within a year, that is considered a short-term capital gain. This is taxed at your normal income tax rate. If you wait longer than a year to sell that stock, bond, or home, it is considered a long-term capital gain, and the rate at which you will be taxed is determined on where you fall in the tax bracket. You must consider both state and federal taxes on capital gains. Often times at the state level, capital gains are taxed as normal income.
Keep in mind that investment growth within your 401K plan or IRA grows tax-deferred until you start withdrawing money. And if you own a home, each tax payer receives an exemption on the first $250,000 gains on a primary residence.
For additional information on capital gains, you can check out the IRS' "Ten Important Facts About Capital Gains and Losses"
. And please call us, experienced Denver accountants, at Bloch, Rothman & Associates, LTD if you have any questions on how capital gains pertain to your tax bill.