Navigating the straits of personal income taxation can prove treacherous for individuals with multiple streams of revenue. Investors earning income on capital gains must include this income in their tax return each year. Determining whether capital gains tax includes state tax requires a look at the nature and structure of capital gain taxation in the U.S., types of capital gains and the relationship between state taxes and capital gains tax.
Capital gains constitute any profit earned from a capital asset. According to the Internal Revenue Service, capital assets include anything you own or invest in, such as stocks, bonds and real estate. Any income earned from the sale of a capital asset constitutes a capital gain. Capital gains only consider capital earned over the purchase price of the item. For instance, if you buy a stock for $20 and sell it for $30, only $10 counts as the capital gain on that sale, not the full $30.
Types of Capital Gains
When it comes to taxation, two types of capital gains exist, short-term capital gains and long-term capital gains. As a general rule, short-term capital gains constitute profits made on an asset held for one year or less. Long-term capital gains constitute profits made on assets held for more than one year. Federal and state tax law consider short-term capital gains a form of regular income. When filing taxes, these gains appear along with other standard revenue such as pay from employment.
Structure of Capital Gains Tax
Capital gains taxation occurs at two levels, state and federal. The federal government taxes long-term capital gains at a lower rate than standard income as a means of encouraging long-term investment. States maintain different, and usually more stringent, laws regarding capital gains tax. Long-term capital gains taxation at the state level applies at the same level as standard tax rates in most states. States without income tax, such as Washington, Texas, Wyoming and Florida don't tax capital gains at all.
State Taxes and Capital Gains
The simple answer to whether capital gains tax includes state tax is no. Rather, state taxes include capital gains tax. Capital gains constitute a form of income. As such, states require that you report this income along with all of your other income when you file you income tax return. Short-term capital gains appear on tax forms with all other income. Separate forms exist for long-term capital gains, although these forms constitute an addendum to standard income tax forms. When filing state taxes for long-term capital gains, you fill out standard forms and the long-term capital gains form and attach it to the standard form.
- Minnesota House of Legislators: Capital Gains Taxation
- Connecticut General Assembly; State Income Tax on Capital Gains; Judith Lohman; 2008
- Internal Revenue Service: Reporting Capital Gains
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Massachusetts Department of Revenue: Personal Income Tax Forms
- TIAA-CREF Financial Services: Glossary
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