Question 1

What is capital gains tax?

Accepted Answer

Capital gains tax is the tax you pay on the profit from selling an investment or asset. The gain is the difference between what you paid for the asset (cost basis) and what you sold it for.

Question 2

How do I calculate capital gains tax?

Accepted Answer

Determine your gain by subtracting cost basis from sale price, classify it as short-term or long-term based on holding period, then apply the appropriate federal and state tax rates.

Question 3

What is the difference between short-term and long-term capital gains?

Accepted Answer

Short-term gains (assets held one year or less) are taxed at ordinary income rates up to 37%. Long-term gains (held more than one year) are taxed at preferential rates of 0%, 15%, or 20%.

Question 4

Do I pay capital gains tax on my home sale?

Accepted Answer

You may exclude up to $250,000 of gain ($500,000 for married filing jointly) if you owned and used the home as your primary residence for at least 2 of the last 5 years.

Question 5

How do capital losses offset gains?

Accepted Answer

Capital losses first offset gains of the same type. Remaining losses offset gains of the other type. Up to $3,000 of net losses can offset ordinary income per year, with unused losses carried forward indefinitely.

Question 6

Does my state tax capital gains?

Accepted Answer

Most states tax capital gains as ordinary income. Eight states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Washington imposes a separate capital gains excise tax of 7% on long-term gains above $278,000.

Question 7

What is the Net Investment Income Tax (NIIT)?

Accepted Answer

The NIIT is an additional 3.8% tax on investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). It applies to the lesser of net investment income or the amount income exceeds the threshold.

Question 8

How much tax will I pay if I sell stock?

Accepted Answer

It depends on your holding period, income, and state. Long-term gains are taxed at federal rates of 0%, 15%, or 20%. Short-term gains are taxed as ordinary income at rates up to 37%. State taxes, NIIT, and local taxes may also apply.

Question 9

How can I reduce or avoid capital gains tax?

Accepted Answer

Common strategies include holding investments over one year for lower long-term rates, harvesting capital losses to offset gains, spreading sales across tax years, donating appreciated assets to charity, and using tax-advantaged accounts like IRAs and 401(k)s.