How to Figure Long Term Capital Gain

Long-term capital gains are taxed at a lower rate than ordinary income.

Long-term capital gains are taxed at a lower rate than ordinary income.

According to the Internal Revenue Service, just about everything you own for personal or investment use counts as a capital asset -- your house, your car, your stocks and yes, even your computer. You won't pay taxes just because value of your property goes up or down, but if you sell any capital asset for a profit, you're going to have a taxable capital gain. If you've held the asset long enough, you'll qualify for the lower long-term capital gains rates, rather than having to pay the higher ordinary income tax rates.

Count your holding period to make sure you owned the asset for over one year. Start counting from the day after you purchased the asset and include the day that you sell it. If you haven't held it for more than one year, your gain is a short-term capital gain.

Calculate your basis for the asset by adding the price you paid to the cost to acquire it. For example, if your selling stock, use the price of the stock plus the broker's transaction fee, so if you paid $4,990 for the stock and a $10 fee, your basis is $5,000. For some capital assets, like your house, you can add the cost of significant improvements to your basis. Suppose your basis for the house is $180,000 and you spend $20,000 to build a garage. Your new basis is $200,000.

Calculate your net proceeds from the sale of the capital asset by subtracting your selling costs from your sale price. For the stock example, suppose you sell it for $6,510 but you also pay a $10 trading fee. Your net proceeds are $6,500. With a larger capital asset, like your home, you might incur sales commissions, advertising fees and legal fees, all of which decrease you net proceeds so if you sell it for $250,000 but pay $10,000 selling expenses, your net proceeds are only $240,000.

Subtract your basis from your net proceeds to figure your long-term capital gain. In the stock example, subtract your basis of $5,000 from your net proceeds of $6,500 to find your long-term capital gain is $1,500. In the house example, subtract $200,000 from $240,000 to find your long-term capital gain is $40,000.

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