Capital Gains Tax - It's Sexy

By Cristina Adams on Thursday July 16, 2009

Ok, maybe not so sexy, but we think it's worthy of some air time.

A capital gain is the difference between purchase price and the selling price of an asset. In other words, if you bought $150,000 worth of stock and sold it three years later for $400,000 (okay, maybe not in the current market, but someday...), your capital gain would be $250,000 -- minus any commission for the broker. You only enjoy a capital gain when the selling price of said asset is higher than the purchase price. So if you sold the stock for $50,000, but paid $150,000 for it, that would be considered a capital loss, because you took a bath when you sold it.

Now comes the tax. Basically, the capital gains tax is a tax on your capital gain, and it can vary, depending on how long you've held onto the investment between buying and selling it. Let's go back to the stock you're selling. If you unload it less than a year after you bought it, and you make money on the sale, that's considered a short-term capital gain. If you wait at least a year and a day - or five or 15 years - to sell it and still make money on the sale, that's considered a long-term capital gain. The short-term and long-term part of it is determined by how long you've had the asset. The magic number for short term is a year or less; for long term, it's a year and a day or longer. (Who comes up with these numbers?) A short-term gain is taxed at your marginal tax rate -- which could be 25% or 35% or something else -- but the tax on a long-term gain tops out at 15%. As you can see, it pays to hold onto your stocks and bonds longer because you're taxed less when you sell them.

As for capital assets, or those assets that can be subject to a capital gains tax, they are "everything you own and use for either personal purposes or investment purposes," as defined by experts at The Motley Fool. That includes obvious items like stocks, bonds, land, your car, precious metals (gold, silver, etc.) and your house or condo, and some not-so-obvious things like art, jewelry, your furniture (in fact, pretty much everything in your house except your clothes and your toothbrush), even your grandfather's coin collection. But before you go selling Grandpa's bag of buffalo nickels or Grandma's set of antique Spode china, be aware that collectibles are covered by "special" tax rules. And in all cases concerning capital gains, don't forget to talk to your accountant or financial planner. Generic rules exist, but every situation is unique, and there are always exceptions to everything financial. So consult an expert.

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