Capital Gains & Losses

The capital gains tax affects millions of American investors. Capital gain is the profit you make on the sale of a nonbusiness investment, and certain business investments, that have increased in value.

Gains on most assets held over a year will be treated as long-term capital gains and taxed at 15% for individuals in the top four tax brackets, and at 5% for individuals in the 10% or 15% tax brackets. From 2008 through 2010, investors in these bottom two brackets will pay zero tax on long-term gains. In 2011, favorable tax reform expires, and investors in the top four brackets will pay 20% on long term gains, while lower-income investors will pay 10%.

Capital gains attributable to depreciation from real estate are taxed at a 25% rate, if it's held longer than 12 months. The gain on collectibles and certain small business stock is taxed at 28%.

When it comes to investing, timing really is everything. Not only do you need to be concerned about an investment's price when you sell, but you should also look at whether selling makes sense from a tax standpoint.

The 15% capital gain rate is quite favorable, but it only applies to investments held for more than 12 months. So, unless you're holding a really volatile stock where the bottom might drop out at any minute, hang on to it for at least a year. Even if the stock price drops a little, you may cut the taxes on the profit nearly in half if you wait.

For example, if you sell stock that you have held for 11 months for a $10,000 gain and you're in the 35% bracket, your after-tax net proceeds would be $6,500. Alternatively, if you sell just one month and one day later for an $8,000 gain (20% less), your net proceeds would increase by $300 to $6,800 because the lower 15% rate would apply.

Timing is also important at the end of the year. If you've cashed in some big gains during the year, review your portfolio for unrealized losses. Take a hard look at any stocks which aren't likely to rebound in value. Sell them and use the losses to offset any gains you've realized.

Always review gains and losses before the end of the year so you can offset gains and to make sure you've paid in enough estimated taxes to cover any gains.

If you end up with more losses than gains, you can use $3,000 of it against other income and carry over the remainder of the losses to next year

When selling shares of stock that you purchased at different prices at different times, inform your broker beforehand that you are selling the shares with the highest basis. This will minimize taxable gain or maximize deductible loss.