As the economy shifts, many individuals seek alternative ways to earn money, which can entail something known as capital gains, which is subject to a special tax. To stay abreast of current tax law, it’s important to understand what this means and how it impacts individual taxation and finances. The article below explores this type of earning and offers details about how it affects both individuals and larger entities.
The What and Wherefore
Capital gains tax refers to taxation on the sale of any property or investment that yields profits more than the original purchase price. Assets, the term applied to any non-consumable purchase, can refer to items purchased for use or things such as stocks or bonds. Whether most people realize it or not, much of what they own falls into this category, and it can often be sold for more than it cost at the time of purchase.
Beyond the purview of ordinary items, individuals and companies can purchase property—such as real estate, inventory or agricultural yields like commodity corn—or stocks. The rationale behind these purchases is seldom personal or corporate use. Often, the raison d’etre is profit upon resale, which requires special taxation. The IRS provides a unique tax form used to claim capital gains, known as a 1099-INT.
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Caveats and Considerations
Regarding individuals, there are exceptions to the capital gains tax. While property is one of the chief examples of such gains, private homes are a bit different. For instance, if one sells a private house that was used as their primary residence for at least two of five years preceding the sale and they have not excluded the tax on the sale of another home in the same period, they can exempt the profits they earned.
While purchases made by corporations can be considered gains, profits made through the ordinary operation of a business aren’t. Even if the company is one such as those in which people purchase items and later sell them online for profit, the IRS does not consider those profits as capital gains. The caveat to this model is that such buying and selling must be done in a professional manner with the clear intent to make a profit as a part of the individual enterprise.
One way to do this is to carefully record the amount of money spent on items, as well as the time and date of sale and the information of the seller. According to TurboTax, this expenditure is considered a business expense and can be claimed as such. Following this logic, any profit made from the sale of these items will be regarded as revenue, subject to employment taxation, but not gains tax.
Another factor individuals should consider carefully before selling an asset is the length of their ownership term. If they’ve held the property or item for longer than one year, tax code deems it a long-term asset. Short-term assets are taxed at a steeper rate—as much as 10 or 20 percent.
Tax rates and rules can be tedious or confusing. However, knowing which items or properties apply and which do not can enormously clarify the situation. The capital gains tax, especially on long-term investments or properties may seem unusual, but it’s often not unreasonable.
