What’s the Deal with Capital Gains?

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eHow Money Blog

Money is just money if you’re trying to buy a cup of coffee.

But to the IRS, not all dollars look alike.

Capital gains – the dollars you make by selling assets for more than you paid for them – are taxed much more lightly than regular income – the dollars you make by toiling in the salt mines.

While regular income can face tax rates as high as 35 percent if you make enough money, long-term capital gains rates are capped at 15 percent as of 2012. While that rate might rise to 20 percent if the Bush-era tax cuts of 2002 expire in 2013, the new rate will still be far less than the 39 percent rates that prevailed in 1979.

Not everyone pays capital gains taxes – according to the public research group FactCheck.org, the IRS reported that only 13 percent of taxpayers sold taxable assets in 2006. Still, the amounts collected are significant. In 2007, for example, the IRS collected nearly $122 billion in long-term capital gains taxes, or an average of $6,100 from every taxpayer who reported a gain. That accounted for about 8 percent of the federal government’s total income tax collections and 4.7 percent of its entire tax revenue for the year (see references 1 and 4).

Capital gains tax money tends to come from the wealthiest segments of society, since most lower-income taxpayers have fewer taxable assets to sell. To generate the 2007 average of $6,100 in capital gains, for example, a capital gains-paying taxpayer had to clear around $40,600 just from the sale of securities or other assets. By comparison, the median family income in the U.S. in 2007 was $50,740 (refs 1, 4, 5).

Capital gains only qualify for the lowest rate, by the way, if you hold the asset for more than a year before you sell it. Otherwise it’s a short-term gain, and your profits will face the same regular income tax rates as the paychecks you made in the salt mines.

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