• by admin
• November 30, 2024

The amount of income tax you pay on your Capital gain could be different if it is taxed in Canada and the United States. In the United States, taxation rules when computing and reporting the taxable amount of capital gains on your income tax return and the applicable capital gain tax rate are different than in Canada. Are you wondering if you should invest in Canada or in the United States? The answer is complex. This blog will discuss how capital gain is taxed and reported on income tax returns in the United States.

When you sell your investment property/capital asset, the gain or loss arising from the sale is treated as a capital gain for income tax purposes. An investment property/capital asset is a property (like shares, real estate, etc.) you intend to hold for income or expect a price appreciation. An inventory you have in your ordinary course of business is not considered an investment property.

 

For example, if you are a daily trader in the stock market and you do not intend to hold the securities for a long term profit perspective, it could be treated as an inventory in the ordinary course of business as opposed to an investment property/capital asset. Income from sale of inventory will be reported as business income (ordinary income) on your income tax return Form 1040.

 

The amount of Capital Gain/Loss

• A simple example of how the capital gain is computed is the selling price minus fees or commission on sales and cost of capital asset.
• A complex example of how the capital gain is computed is when the subject property is a depreciable property, in which case the recapture of depreciation may apply.
• Another complex example of how capital gain is computed is when you exchange property for another property, or you give away the property, etc.

Based on the above examples, the amount of capital gain you have in a situation will be reported on your income tax return 1040 Schedule D and taxed for income tax purposes.

You have capital gain if you sell your capital assets for more than its adjusted cost. However, when your adjusted cost is higher than the amount realized on the sale of the capital asset, then you have a capital loss.

 

Taxation of Capital Gain in the United States

Capital gain types

1. Short-term capital gain
2. Long-term capital gain

In the United States, capital gain arising from a capital asset transaction can be classified as short-term capital gain or long-term capital. Short-term and long-term capital gains are taxed differently. The amount of income tax you may have to pay or payable will depend on the amount of gain and the type of gain.

 

1. Short-term capital gain -as mentioned above, capital gain applies where you intend to hold the asset to produce income or expect appreciation. If you hold the asset for a year or less before you dispose of it, the gain arising from this transaction will be treated as a short-term capital gain.

 

1. Long-term capital gain – Generally, when you hold the asset for more than one year, any capital gain arising from this transaction will be classified as long-term capital gain.

 

There are certain exceptions to the above rules, such as property acquired by gift, property acquired from a decedent, or patent property, commodity futures, partnership interest, etc.

 

Net Capital gain

1. Net-long term capital gain
2. Net-short term capital loss

 

The income tax payable on your capital gain is computed on your net capital gain. The net capital gain is taxed differently from the ordinary income on your income tax return. A reduced capital gain tax rate applies to your net capital. The capital gain tax rate is lower than the income tax rate on your ordinary income.

 

Net capital gain = net long-term capital gain for the year minus your net short-term capital loss for the year.

 

In the above paragraph, we have arrived at a point where you either have a short-term capital gain/loss or a long-term capital gain/loss. Let’s look at a situation where you have both a long-term capital gain and a short-term capital loss.

 

1. Net-long term capital gain = long-term capital gains for the year minus long-term capital losses for the year minus any unused long-term capital loss carried over from previous years.

 

1. Net-short term capital loss = short-term capital loss for the year minus short-term capital gains for the year minus any unused short-term capital loss carried over from previous years.

 

Tax rates on net capital gain

For tax year 2023 and onward

A capital gains tax rate of 0% applies if your taxable income is less than or equal to:

Filing Status	Taxable Income
Single and married filing separately	$44,625
Married filing jointly and qualifying surviving spouse	$89,250
Head of household	$59,750

 

A capital gains tax rate of 15% applies if your taxable income is:

Filing Status	Taxable Income
Single	Above $44,625 to 492,300
Married filing separately	Above $44,625 to 276,900
Married filing jointly and qualifying surviving spouse	Above $89,250 but to 553,850
Head of household	Above $59,750 to 523,050

 

A capital gains tax rate of 20% applies:

If your taxable income exceeds the above taxable income threshold, of a capital gains tax rate of 15%, based on your filing status.

 

A capital gains tax rate of above 20% applies if:

• When you sell coins or arts (collectibles), the net capital gains from selling these items are taxed at a maximum 28% rate.
• Any gains arising from selling small business stock (a section 1202 qualified small business stock ) is taxed at a maximum 28% rate.
• When selling a real property (section 1250 real property), you may have any unrecaptured section 1250 gain, is taxed at a maximum 25% rate.

 

Note: if you have a net short-term capital gain, it is taxed as an ordinary income at graduated tax rates.

 

Limit on the deduction and carryover of losses

The amount of capital loss that you can claim to lower your income is up to $3,000 ($1,500 if married filing separately). If your net capital loss exceeds this limit, you can carry the loss forward to later years.

 

Do you know that you can defer your income tax payable on the net capital gain? 

 

Resources used: Internal Revenue Services  | Internal Revenue Code of 1986 (IRC)

Disclaimer: Information in the post has been presented for a broad and straightforward understanding. This is not a legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situation. You need to contact your accountant or RKB Accounting for further information.

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