Capital Gains Tax Rate

The advantage of capital gains, as opposed to ordinary income, is that the basic maximum tax rate on capital gains for property held for more than one year is 20 percent, and the maximum is only 10 percent for taxpayers who'd otherwise be in the 15 percent bracket. In contrast, the top four ordinary income tax rates are all higher than this, with the top rate for 2002 at 38.6 percent.

Work Smart Capital gain rates are, like anything else, always subject to change. An example of this is the qualified five-year gain rate that begins to take effect in 2001. Beginning in 2001, the 10 percent capital gain rate will be lowered to eight percent for a capital asset you have held for five years. The 20 percent rate is reduced to 18 percent, but with the limitation that the asset be held for five years starting from 2001. The reduced rates are to encourage and reward you for investing in assets longer, so you may want to consider a more long-term strategy when holding your assets.

There are some situations where other rates will apply to gains on certain types of property.

The long-term capital gains rate on business or investment real estate (called "section 1250 property" on the tax forms) will be 25 percent up to the amount of depreciation on the property while you owned it. However, there are no losses counted in the 25 percent rate group and any loss from this group must be taken into account in computing net gain or loss in the 20 percent rate group. Also, the long-term capital gains rate on collectibles such as art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines, or antiques is 28 percent.

For small business owners, capital gains have another advantage worth mentioning. Unlike the money you earn in your business, capital gains are not subject to the 15.3 percent self-employment tax. However, if a major activity of your business is buying or selling property that would be capital gains property in the hands of the average taxpayer -- for example, you're a dealer in coins or stamps, or you're a real estate developer -- you will have to treat your gains on sales as ordinary business income, reported on Schedule C rather than Schedule D. In that case, you would be subject to self-employment tax on these gains.