Calculating Capital Gains Tax – How & How Much?

Working It All Out!

August 13, 2004
By Niles Brohey

Capital gains taxes are levied on the profits which are gained from the sale or exchange of capital assets. Many assets come under this heading including shares, real estate, and property. Capital gains tax rates vary but are determined by a small number of key metrics which we must be taken into account when calculating capital gains taxes.

To calculate your capital gains tax rate you must consider three facts – the rate of income tax you pay, how long you have possessed the asset in question, and what the asset is (is it shares, or a business or real estate for example?). These three variables will mostly determine the rate of capital gains tax you pay.

For short term assets (those held for less than one year) the rate of tax is the same as the rate of personal income tax you pay. For long term assets (assets you have held for one year or more) your long term capital gains tax rate takes hold. Except when trading in special assets (such as real estate or collectibles) this rate is determined by your personal income. If you pay more than 15% income tax you can expect to pay 15% capital gains tax on long term asset exchanges. For those who pay less than 15% income tax the capital gains tax rate is likely to be 5%.

As mentioned above there are certain assets on which a special rate of capital gains tax is charged. Capital gains tax on real estate gains is 25% and the tax on the sale of collectibles is 28%, these rates are at least 10% higher than you will pay on standard capital assets and furthermore these special rates do not depend on your income bracket.

When you are calculating your capital gains tax on your net gains you must also take any tax free allowance you have into account. For example a married couple can avoid paying tax on their first $500,000 capital gains if they have lived in a home being sold for two out of the five previous years.