Understanding Capital Gains and Losses

Multiple tax rates hold the key

With the recent volatility in the stock market, it is only natural to want to sell your investments. While the market may panic, making an informed, calm, and planned decision can be your best option. Part of this decision-making process is understanding the tax consequences of selling your investments.

Investment Tax Rates
Investment Tax
Retirement Accounts:
401(k), 403(b), traditional IRA, SEP IRA, SIMPLE IRA
Ordinary income (when funds are withdrawn from the account) Determined by the account type (usually withdrawals after age 59½) 0% up to 39.6%* There is not a tax event when an investment is sold within your account. The tax rate depends on your annual income at time of fund withdrawal.
Retirement Accounts:
Roth IRA and Roth 401(k)
No tax on withdrawals 5 years and 59½ years old or older. N/A Earnings are not taxed as long as rules are followed.
Short Term Capital Gains (STCG) Ordinary income 1 year or less 0% up to 39.6%* For investment sales such as stocks and bonds
Long-term Capital Gains (LTCG) LTCG rates More than 1 year
0%: in 10 or 15% tax bracket
15%: in 25-35% tax bracket
20%: in 39.5% tax bracket*
For investment sales such as stocks and bonds
Depreciation Recapture Special Any 25% When you sell property that has been depreciated in prior years, part of your sale price may be taxed as a recapture of this prior period depreciation.
Collectables Special Any 28% A special tax rate applies to gains on the sale of items you collect; like coins and baseball cards.
Investment losses Ordinary income Any Offset benefit:
0% up to 39.6%
Losses can offset income up to $3,000 each year
* a3.8% Net Investment Income Tax may also apply to these earnings.

As the above tax rate chart suggests, understanding the tax consequence of selling an investment can be complicated. Your tax obligation could be subject to no tax or up to 39.6% plus an additional 3.8% for the Net Investment Income Tax. Here are some things to think about.

Within retirement accounts

Point Selling investments within retirement accounts. Selling investments within your retirement accounts is not usually a taxable event. The potential tax event occurs when you take the funds out of your account either by a withdrawal or occasionally as a rollover into another account.
Point Follow the account rules. Each of your retirement accounts has its set of rules. If you follow them, you can avoid early withdrawal penalties. Following the holding period rules within Roth accounts can also make your withdrawals tax-free.

Gains and losses outside retirement accounts

Point Losses. You may deduct investment losses of up to $3,000 per year. These losses first offset any investment gains. If there are no gains your loss can offset your ordinary income. So the benefit of losses can be worth next to nothing or up to 39.6% if it offsets ordinary income.
Point Non-investment losses. Unfortunately, individuals may not offset losses on the sale of non-investment property. So if you sell a car and make money, you need to report the gain. If you sell the car and lose money, there is no deductible loss unless it is part of a business transaction.
Point Long-term better than short-term. Holding an investment for longer than one year is key if you want to minimize your tax obligation. Short-term gains are taxed the same as wages.

If nothing else, please remember your investment decisions can often have tax consequences. Please ask for help before taking action.

States Becoming Tax Thieves?

Small business consultants beware

Over the past few years, state revenue departments have been getting creative in making new tax laws to capture non-resident income taxes. If you are an individual operating as a sole-proprietor consultant or service provider, here is what you need to know.

This could be you

Point You could owe state income taxes to a state you never visited or worked in.
Point Non-resident employees doing the same work you do as a consultant may not have to pay state income taxes while you must.
Point Federal law protects non-residents from state revenue attacks, but only if you sell tangible property (like pencils, watches and other physical property). It generally does not protect those who provide services.
Point Every state can be different. Just because you know your state’s rules, do not assume other states follow the same guidelines. Nor should you assume other state laws are logical or reasonable.

What can you do?

If you are a consultant providing services to out-of-state customers, here are some tips.

1 Research the states rules. Research your customers’ state tax laws for non-resident service businesses. Also review that state’s non-resident employee wage rules. See if they treat them both the same way.
2 Become a temporary employee. If non-resident rules are different for consultants versus employees, consider becoming a part-time employee or temp employee. Adjust your bill rate to allow for the employer paying half of your Social Security and Medicare.
3 Physical presence. If you conduct your work in the out-of-state location, a non-resident tax return is usually due. But this is not always the case.
4 Service or product? Remember, selling product across state lines is different than providing a service. Nexus laws and tax cases make physical presence required. But here too, there can be exceptions.
5 If in doubt, ask for help. The best advice is to ask for help. This area of tax code is rapidly evolving. There are no national guidelines and states like California and Michigan are very aggressive. Exceptions in state rules make mistakes easy to happen. This can lead to you owing taxes to another state based on your out-of state activities.


Small service businesses cannot readily defend themselves against large state revenue departments so they are becoming victims as one state tries to take another state’s income tax revenue. While you may receive a credit in your home state for taxes paid to another state, it is not always easy to do and penalties are often applied. Your best defense is knowledge.

IRS Data Theft Larger than First Reported

Check Your Mail

“Check your mailbox.”

Normally these words are used in anticipation. As children, it may be looking for a free prize. As adults, it may be the expectation of a tax refund. Now check your mailbox is in anticipation of the IRS letting you know your tax records may have been stolen.

The IRS reports that an additional 220,000 taxpayer accounts have been accessed through a breach in their “Get Transcript” application. The IRS also identified another 170,000 failed attempts to gain access to records. Because of this, the IRS is sending out announcements to affected taxpayers in addition to the 100,000+ taxpayers

What happened

Thieves used stolen Social Security Numbers, names, addresses, and added information to get past the IRS Get Transcript authentication protocols. The thieves could then get copies of IRS transcripts. The IRS believes thieves will try to use this information to file fraudulent tax returns in 2016.

Next steps

The IRS will be contacting the additional taxpayers shortly via mail. If you are impacted, you can sign up for free credit monitoring and the IRS will flag your account for potential theft risk.

Below is a link to the full announcement on the IRS website:
Additional IRS Statement on the “Get Transcript” Incident