New York is notoriously one of the highest-taxed states in the United States, making it a place where financial matters play a crucial role. Whether you’re a resident or an investor – understanding the Capital Gains Tax is essential. In this blog, we’re going to break down the basics of what capital gains tax is, how it works, and key considerations.
What is Capital Gain?
Before talking about capital gains tax, let’s dive further into what capital gain is. Capital gain, in simple terms, is a financial gain that occurs when a capital asset is sold for more than you originally paid for it. Capital Assets can include things like bonds, real estate properties, precious metals, cryptocurrencies, and more. Anything used for personal purposes, pleasure, or investments - including stocks, bonds, homes, cars, jewelry, and art.
In simple terms, when an asset is sold at a price higher than the original, it results in a capital gain. If an asset is sold at its original price, it is a capital loss.
When a person incurs a gain, they must pay tax on it. The tax rates vary depending on two factors: how long the asset was held and the amount of income the taxpayer earns. If an asset was held for less than one year and sold for a profit, it is classified as short-term and taxed as ordinary income.
What is Capital Gains Tax?
In New York, for example, capital gains are often taxed as part of your overall income. That means, your capital gains tax rate aligns with the regular income tax rate – ranging from 4% to 8.82% depending on your income level. The longer you hold an investment, the lower your capital gains tax rate may be.
So, to keep things nice and easy, if you buy a home for $100 (we wish), and then a few years later, you sell that home for $1,000 (Wow! Congrats!) and the NY tax rate for your income is 5%, you would owe approximately $45 in taxes. That’s a pretty great ROI if you ask me. When you start making bigger purchases, though, and considering selling those assets, it's important to plan for capital gain taxes.
Key Factors
The length of the holding period determines how you are taxed. A holding period is how long an individual holds an asset, with a short-term period being one year or less, and a long-term period standing for more than one year. If the asset is held short term, they are taxed at the regular income tax rate. A long-term capital gain asset can qualify for lower tax rates.
Certain capital gains can be exempt from the New York state tax, these are called exemptions. An example of this would be the sale of a primary residence, up to a certain limit.
Much like exemptions, deductions are another key factor to consider in capital gains reporting. Like any other form of income, you may be eligible for deductions that reduce your overall tax burden. Deduction opportunities vary based on the assets involved, speak to a tax professional for expert advice when determining deduction possibilities.
Why are Capital Gains Important?
Understanding capital gains tax is critical for anyone involved in investment activities within a high-tax state like New York. Having a good grasp on the basics of how capital gains are taxed while considering key factors such as holding periods and exemptions helps ensure you’re prepared for reporting needs during tax season. Hiring a knowledgeable and trustworthy CPA can open the door to better financial handling and correct tax reporting. Remember, staying informed is the key to financial success in the Empire State.