Tax
Capital Gains
Profit from selling a capital asset (stock, a business, real estate), taxed at preferential rates when the asset was held more than one year.
Sell an asset for more than your basis and the profit is a capital gain. The tax rate turns on holding period: one year or less is short-term, taxed at ordinary income rates; more than one year is long-term, taxed at 0%, 15%, or 20% depending on income. High earners add the 3.8% net investment income tax on top.
For business owners, capital gain treatment is the prize in an exit. A stock sale of a C-corp or S-corp generally produces capital gain (potentially excluded entirely under QSBS for qualifying C-corp stock). An asset sale gets allocated across asset classes: some is capital gain, but depreciation recapture and inventory are taxed at ordinary rates. The purchase-price allocation is where the tax outcome of a sale is actually negotiated.
Capital losses offset capital gains dollar-for-dollar, plus up to $3,000 of ordinary income per year, with the excess carrying forward indefinitely, the mechanism behind year-end loss harvesting.
Common pitfalls
- Selling at 11 months and change, when a few weeks of patience can cut the federal rate dramatically
- Forgetting depreciation recapture on real estate and equipment; the portion attributable to prior depreciation doesn't get the low capital gains rate
- Ignoring state taxes; most states tax capital gains as ordinary income, and California conforms to neither the federal rate preference nor QSBS
Related service
See personal tax servicesHave a Capital Gains situation in your business?
Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.