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5 Myths About Capital Gains Tax


5 Myths About Capital Gains Tax

Chris Bibey
by Chris Bibey

If you believe any of the myths surrounding capital gains tax and how it affects you, there is a good chance that you will include erroneous information on your income tax return. This can lead to problems in the future, including a lower tax refund or even an audit by the IRS. It is important to learn the facts regarding capital gains tax, while also being aware of the myths that confuse many taxpayers. Below are 5 major myths concerning capital gains tax:

MYTH #1: Short-term and long-term capital gains tax rates are the same. This is a myth that too many taxpayers believe. Unfortunately, it is anything but the truth. Short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains are taxed at no more than 15% (for most taxpayers), based on your income level.

MYTH #2: There is no such thing as a 0% capital gains tax. In 2008, the federal government introduced the 0% capital gains tax. It gives low-income earners the chance to sell their capital assets without paying taxes on the profits. Those who are in the lowest 2 tax brackets (the 10% and 15% brackets) are not required to pay capital gains tax.

MYTH #3: It is impossible to manage how much you pay in capital gains tax. While you definitely have to pay capital gains tax to the IRS, there are things you can do to keep your tax to a minimum. For instance, you can offset capital gains by deducting your capital losses (up to $3,000 per year if married filing jointly; up to $1,500 per year for married couples filing separately), which can help keep more money in your pocket. You may also choose to hold your assets for over a year, since the long-term capital gains tax rate tends to be lower than the rate for short-term gains.

MYTH #4: The way that short-term and long-term capital gains are calculated changes every year. It is difficult to say where this myth comes from, but it is one that many people believe. The truth is that a short-term capital gain stems from the sale (and profit) of an asset that was held for 1 year or less. A long-term capital gain occurs when you sell and profit from an asset that you owned for longer than a year.

MYTH #5: You do not have to report capital gains every year. This is entirely false. Whether you have short-term or long-term capital gains, you need to report them to the IRS using Schedule D (Capital Gains and Losses) of Tax Form 1040 (U.S. Individual Income Tax Return). If you have deductible capital losses, they must also be reported on your return. There are many myths related to the capital gains tax ― the 5 listed above are very common and have confused many people over the years.

Once you determine the facts versus the myths, you can begin to understand capital gains tax and how it affects you.