A go-to guide when selling your valuable assets.
If you’ve contemplated selling land, stock, or other valuable assets in 2023, it’s a good idea to visit with a tax advisor first to help limit, or avoid, some pesky capital gains taxes.
What is capital gains tax?
Capital gains tax is owed in the year you sell assets such as stocks, bonds, cryptocurrency, art, real estate, or other assets for a profit. You subtract the original cost from the sale price to calculate the taxable amount. Then, multiply the amount by the applicable tax rate based on your income.
Carol Angerer, CPA, with Abbott & Angerer, CPAs LLC, explains that a financial advisor can identify the original price (i.e., cost basis) for most investments, but she still suggests keeping your own records.
What is the difference between short-term and long-term capital gains?
Short-term gain treatment applies to anything owned less than one year and sold for a profit. These gains are taxed as ordinary income rather than capital gains. Generally, long-term gains rates apply to anything owned more than one year.
“Many people are concerned about long-term capital gains tax, but it can actually be a good thing because the rates are lower than most ordinary income tax brackets,” Angerer says.
For example, qualified dividends paid to stockholders are taxed at capital gains tax rates with a maximum rate of 20% based on total taxable income. Ordinary dividends and interest income are taxed as ordinary income at a maximum rate of 37% based on total taxable income.
Angerer advises clients to discuss investment decisions with their tax and financial advisors beforehand.
How do I avoid capital gains tax?
According to Angerer, taxpayers should consult their tax advisors annually about large purchases and sales.
“If you wait until tax time to share you’ve sold something, I don’t have many tricks left in my bag to help because an off setting loss needs to happen in the same calendar year as the gain,” she says.
Tax exposure can decrease in two ways. First, you can sell another asset that has declined in value. This loss can off set any gains you already made in the year (i.e., tax-loss harvesting). Second, if your losses outpace your gains, you can off set $3,000 ($1,500 if married filing separately) of your other taxable income. Any loss over $3,000 can be carried into a new year. If you sold a stock at a loss, you can’t repurchase it within 30 days and still get credit for the loss (i.e., wash sale). The IRS calls this creating artificial losses for tax breaks.
“It’s important to stay the course, seek sound advice, and understand investment risks ahead of time.”Carol Angerer, CPA, Abbott & Angerer
Can you be exposed to capital gains and not know it?
Angerer says taxpayers often get confused about selling their primary residence. She says you don’t pay capital gains if you lived in and owned your home for two of the last five years and you did not gain more than $250,000 (single)/$500,000 (married fi ling jointly) on the sale.
Angerer also says that during the pandemic, many people began online investment trading. They bought and sold securities without considering the, sometimes sizable, capital gains consequences.
“It’s important to stay the course, seek sound advice, and understand investment risks ahead of time. Moving everything to cash when the market is down 20% may not be the best idea from a long-term capital gains perspective.”
Terms to know:
Cost basis — The original value or purchase price of an asset.
Tax-loss harvesting — Selling investments that lost value during the year to offset gains made by other investments to reduce, or avoid, long-term gains tax exposure. For example, a person’s investment portfolio can have a market gain of $10,000. If they sell some investments with a market loss of $10,000 before the end of the year, they would avoid long-term capital gains taxes.
Wash sale — Selling an investment at a loss and repurchasing the same, or substantially similar, investment within 30 days.