Capital is a unique term when it comes to taxes. If it gains value, you pay a tax. If it loses it, you can write at least some of the loss off.
Capital Assets – Gains and Losses for Taxes
Practically everything you own is a capital asset. This is true whether you use it for business purposes or personal use. The internet revenue service is very interested in your capital assets. Why? The IRS likes to tax the full gains while only giving you a small break on any lost value. Specifically, you have to report and pay taxes on gains in value of your capital assets when you sell them. Unfortunately, you only get to claim a loss on capital assets if it is an investment property such as stocks. Doesn’t seem fair, but that is how the cookie crumbles these days!
Here are some tax issue highlights on capital assets:
1. Generally, you report gains and losses on capital assets by subtracting the price you purchased it for from the price you sold it for. This calculation is reported to the IRS on Schedule D, which should be attached to your 1040 tax return. Lucky you!
2. Capital gains and losses are classified as long-term or short-term. The classification breaks down on…tad a, how long you’ve owned the capital asset in question before selling it to someone else. If it has been less than a year, it is a short-term gain or loss. Hold on to it for more than a year and you are looking at a long-term gain or loss when reporting taxes. Each classification requires different tax calculations and you will ultimately pay different amounts of tax.
3. In a bit of good news, you are generally going to pay less tax on a capital asset gain. For the 2005 tax year, the tax rates range from a miserly five percent to a more painfull 28 percent.
4. While the IRS is happy to tax all of your capital gains, it has different views towards losses. You can deduct losses, but only up to $3,000 each year.
We all have capital assets, even if we don’t realize it. Unfortunately, the IRS is aware of this, so make sure to report your gains and losses.