May 7, 2021
If you own capital assets, such as a house, stock options (ISO, NSO, RSU), or a retirement plan, then you need to be aware of the term "capital gains". Eventually, you may one day sell your assets to make a profit and can appreciate your investment pay off. However, you should understand that selling capital assets is a taxable event, and you’ll need to be prepared to claim any gains on your taxes and pay up accordingly.
In simple terms, capital gains are the increase in value of an asset. This higher value is not considered a capital gain until the asset is sold. Capital gains are most commonly associated with stocks and mutual funds, given their volatility, but can apply to any financial asset. For example, if you bought a house for $100,000 and later sold it for $150,000, you would have a capital gain of $50,000 (minus expenses).
Capital gains can be categorized as either short-term or long-term. Typically, if you hold onto an asset for more than a year, your capital gain is considered long-term, but this is only the case for stock that you purchase from a company that is publicly traded on an exchange like the NYSE or NASDAQ.
For stock purchased in a private venture-backed company the rules are different. Sales of ISOs at least two years after the grant date AND at least one year after you exercise or buy your options will qualify. Completing only one or the other (or neither) holding requirement will disqualify you and make you liable for taxes at the short-term tax rates.
Not all capital gains are subject to tax. For example, if you sell a house and the difference between your selling price and your initial purchase price is less than $250,000 (or $500,000 for married couples), then you do not need to pay capital gains tax in some cases.
However, most capital gains will be subject to the capital gains tax rate, which is usually anywhere from 0% to 15%. For many individuals, this is a lower tax rate than your ordinary income tax. In some cases, your tax rate may be 20% if your income exceeds $434,550 for singles or $488,850 for married couples.
If you receive a capital gain, you may need to make estimated tax payments. You’ll also need to know whether to report your capital gain on your taxes (in most cases, the answer is yes). Work with a trusted tax professional who can answer your questions on capital gains and ensure your profits won’t be destroyed by penalties or other losses.