Capital Gains Tax: Understanding How It Works and Exploring the Ways to Reduce

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Complying with various local, state, and federal taxes in Florida can be challenging as it is nearly impossible for an individual to be aware of every tax law and regulation unless you are a professional tax expert. 

Therefore, if you are looking for ways to minimize capital gains taxes, a Pompano Beach tax accountant can maximize your tax savings. At the same time, a tax accountant can bring you several other benefits, like time-saving, peace of mind, tax optimization, and much more.

What is capital gains tax?

Investment items like stocks, bonds, real estate, etc., and tangible items are all regarded as capital assets. So, when an individual sells a capital asset for a price higher than its original value, the money you earn is called capital gain.

Capital gain taxes are the taxes levied on the profit you earn from selling one of your capital assets. Capital taxes are progressive, and the tax levied depends on the value of what you sold, the duration you owned the asset, your taxable earnings, and your filing status.

Here are some important things to know about capital gains taxes:

  • Capital gains up to $47,025 are tax-free.
  • Short-term capital gains tax is levied if you sell a capital asset you have owned for less than a year.
  • Tax brackets for short-term capital gains tax are the same as income tax, i.e., 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
  • If you sell a capital asset after owning it for more than one year, long-term capital gains tax is levied.
  • Depending on taxable income and filing status, the long-term capital gains tax is levied at a rate of 0%, 15%, or 20%.

When does capital gains tax become applicable

Here’s when your investment can be subject to capital gains taxes:

  • When you sell a property for profit, the profit you earn after excluding the first $250,000 is subject to capital gains tax.
  • If you sell a stock or cash your savings in a bond, the profit you earned is reported as income, and the same is taxed as per capital gains taxes. However, the losses you incur may be subtracted from your taxable income.
  • The distributions of your mutual fund shares are subject to short or long-term capital gains taxes.
  • The profit you earn by selling a digital currency, like cryptocurrency or NFT (non-fungible tokens), is also taxed under capital gains taxes.

Effective capital gains tax strategy

You can employ the following strategies to save on capital gains taxes:

  • Use your capital losses to offset the gains.
  • Sell stock shares for losses and buy them again, but be mindful of rebuying after at least 30 days, as failing to do so would break the IRS’ wash-sale rule.
  • Contribute to a tax-advantaged retirement plan like 401(k).
  • Sell capital assets after more than a year of buying them to qualify for long-term capital gains taxes, which are usually lower than short-term capital gains taxes.