By definition, "capital gains" is the profit made by selling an item for more than it was purchased. The gain is received when the item is sold, and the capital gain is considered income by the Internal Revenue Service. For example if a car is purchased for $1,000 and then sold for $1,500, the capital gain is $500. Long-term capital gains are taxed at a lower rate than other forms of income. As of 2009, the long-term capital gains tax rate averages 15 percent, while short-term capital gains taxes are charged based on your normal tax rate.
Instructions
1. Establish the original amount paid for an item; this is called the cost basis. Going back to the car example, the cost basis is $1,000.
2. Determine the amount for which you sold the item. The car was sold for $1,500, so this is the sale price of the item.
3. Subtract the original price of the item from the price for which you sold it. You purchased the car for $1,000 and sold it for $1,500; this gives you a capital gain of $500.
4. Decide if your capital gain is short-term or long-term. Short-term gains are profits made on items you owned for less than one year. Long-term gains are profits made on items you owned for more than one year.
5. Determine what tax bracket you are in, as this information is used to determine the amount of capital gains taxes you must pay (See Resources). Short-term gains are taxed at your normal tax rate, while the majority of long-term capital gains taxes are taxed at 15 percent. For example, if you are in the 25 percent tax bracket, you will pay 25 percent for short-term capital gains taxes, but only 15 percent for long-term capital gains taxes.
