Taxes on Capital Gains

Understanding taxes on your capital gains
Understanding taxes on your capital gains

Many taxpayers think of capital gains as something restricted to Wall Street: buying and selling stocks and bonds. In reality, almost everything owned for investment purposes or personal use may be considered a capital asset for income tax purposes. Common examples of capital assets include stocks and bonds, as well as your residence, vacation home, rental real estate and collectibles.

When you sell a capital asset, you must calculate the difference between the sales price and your basis in the asset. If the sales price is more than your basis, you have a capital gain; if the sales price is less than your basis, you have a capital loss.

In most cases, your basis is the purchase price of an asset. However, some assets, like a home, may be improved over the years; improvements increase the basis. Let's say, for example, that you purchased your home in 1998 for $100,000. That's your basis. But if you built an addition onto the home that cost $25,000 in 2000, your basis in the home is now $125,000 (the purchase price of $100,000 + the addition cost of $25,000).

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