You're required to pay capital gains taxes any time you sell capital assets for a profit. Capital assets include anything you own and use for personal or investment purposes, such as your car or stocks. Any capital gains must be reported on your federal income taxes. To do this, you need to know your basis and net proceeds in order to calculate your gains.
Usually, your basis is what you paid for the assets, including transaction costs. For example, if you buy stock for $3,000 and pay a $10 trading fee, your basis is $3,010. However, if you inherited stock, your basis is the fair market value on the date of death, regardless of whether it's more or less than the decedent originally paid for it. For example, if stock was worth $3,600 when the decedent died, that's your basis.
The net proceeds of your capital asset sale equal what you sold it for minus your selling costs. For example, if you sell stocks for $3,500, but you pay $10 to your brokerage, your net proceeds are only $3,490. To figure your taxable capital gains, subtract your basis from your net proceeds. For example, if your basis is $3,010, subtract $3,010 from your net proceeds of $3,490 to find your taxable gains equal $480.
The tax rate applied to your capital gains depends on how long you owned the capital asset you sold. For assets you owned for a year or less, your gains are taxed at the ordinary tax rates, which go up to 39.6 percent. However, if you hold the asset for more than a year, your gains are only taxed at the lower capital gains rates -- a maximum of 20 percent as of 2013.
Offsetting with Losses
You can use losses from selling capital assets held for investment to offset your capital gains during the year. If you have more capital losses than capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) against your other income. Any additional losses must be carried forward to the next tax year. However, losses from selling capital assets used for personal purposes can't be deducted. So, if you only get $240,000 for your home that you paid $280,000 for, you can't write it off.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."