When you make a profit on the sale of an asset, like stock, real estate or investments, you might be subject to capital gains tax. The capital gains tax is based on the amount of profit. The tax is collected by the federal or state government. The taxpayer is responsible for reporting the gain on their tax return and paying any tax owed.
Capital Gains Tax
Capital gains tax is calculated by taking on the difference between the price you purchased an asset for and the sale price when you sell it. If you hold the asset for more than a year, it is considered a long-term capital gain, which is taxed at a lower rate than short-term capital gains. The tax rate varies depending on the individual's income and the type of asset being sold. In a real estate transaction, each party has different responsibilities when it comes to capital gains taxes.
The Seller
In most cases, the seller is responsible for reporting and paying capital gains tax on the sale of an asset. This means that if you sell stocks or other investments, you are responsible for calculating the amount of capital gains tax owed and reporting it to the government. If the sale of the asset results in a loss, you might be able to claim a tax deduction for the amount of the loss.
Real Estate Agents
If you sell a piece of real estate, your real estate agent may also be involved in collecting capital gains tax. Real estate agents are required to report the sale of real estate to the government, and they may be responsible for withholding a portion of the sale proceeds to cover any capital gains tax owed. This is known as the "Real Estate Withholding Tax."
The Buyer
In some cases, the buyer may be responsible for collecting and paying capital gains tax on behalf of the seller. This is known as "backup withholding." Backup withholding is typically required when the seller fails to provide their tax identification number or provides an incorrect number.
The Role of the Government
It is the government's responsibility to collect capital gains tax at the local and state levels. The Internal Revenue Service (IRS) is the government agency responsible for enforcing tax laws and collecting taxes owed. The IRS may audit individuals or businesses to ensure that they have accurately reported and paid their capital gains tax.
The Bottom Line
Capital gains tax is collected by the government, but the seller is typically responsible for reporting and paying the tax if they sell an asset. Real estate agents may also be involved in collecting capital gains tax on the sale of real estate. In some cases, the buyer may collect and pay the tax on behalf of the seller. Regardless of who is responsible for collecting and paying capital gains tax, it is important to accurately report and pay the tax owed to avoid penalties and interest.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
FAQs
Capital gains tax is a levy imposed by the IRS on the profits made from selling an investment or asset, including real estate. Primary residences have different capital gains guidelines than rental and investment properties do.
What level of government collects capital gains tax? ›
The IRS taxes your net capital gain, which is simply your total long- or short-term capital gains (investments sold for a profit) minus the corresponding long- or short-term total capital losses (investments sold at a loss).
Who claims capital gains tax? ›
All taxpayers must report gains and losses from the sale or exchange of capital assets. California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income.
Who is responsible for reporting capital gains? ›
The capital gains tax is based on the amount of profit. The tax is collected by the federal or state government. The taxpayer is responsible for reporting the gain on their tax return and paying any tax owed.
Do you pay capital gains after age 65? ›
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the 'tax basis'.
What is the 6-year rule for capital gains tax? ›
This means the capital gains tax property 6-year rule effectively resets every time you move back into your property, so you can avoid paying capital gains tax on the condition that you move back within up to six years of moving out. As it stands, there isn't a limit on how many times you can use these tax exemptions.
At what age do you not pay capital gains? ›
For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
What are the rules for capital gains tax? ›
If you only held the investment for a year or less, then the short-term capital gains tax rates will apply. These tax rates and brackets are the same as those applied to ordinary income, like your wages, and currently range from 10% to 37% depending on your income level.
Which states do not pay capital gains tax? ›
States That Don't Tax Capital Gains
- Alaska.
- Florida.
- New Hampshire.
- Nevada.
- South Dakota.
- Tennessee.
- Texas.
- Wyoming.
This tax is applied to the profit, or capital gain, made from selling assets like stocks, bonds, property and precious metals. It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset.
Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return. Capital gains and losses are classified as long-term or short term.
What happens if you don't report capital gains? ›
The IRS has the authority to impose fines and penalties for your negligence, and they often do. If they can demonstrate that the act was intentional, fraudulent, or designed to evade payment of rightful taxes, they can seek criminal prosecution.
Do you get a 1099 for capital gains? ›
How do I report capital gain distributions? Capital gain distributions are reported to the taxpayer on Form 1099-DIV. If there is no sale or disposition of capital assets to report, the Form 1099-DIV amount is reported directly on Form 1040 with a checkmark in the box to indicate a Schedule D is not required.
Do I pay capital gains if I reinvest the proceeds from sale? ›
While you'll still be obligated to pay capital gains after reinvesting proceeds from a sale, you can defer them. Reinvesting in a similar real estate investment property defers your earnings as well as your tax liabilities.
Does the IRS collect capital gains tax? ›
Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than 15% for most individuals.
How do you receive capital gains? ›
If you sell your asset for more than you bought it, you'll have a capital gain – If the opposite is true and you sell the asset for less than you bought it, you'll have a capital loss. Capital gains tax is the taxation of capital assets.
How does the IRS know if you have capital gains? ›
Capital gain distributions are reported to the taxpayer on Form 1099-DIV. If there is no sale or disposition of capital assets to report, the Form 1099-DIV amount is reported directly on Form 1040 with a checkmark in the box to indicate a Schedule D is not required.
