The Internal Revenue Service cares so much about you and what goes on in your life that just about every penny you bring in is potentially taxable income. If you've got an old car that you're selling, it might add to your tax bill if you make a profit on the sale. However, if you do have taxable income, you might be able to take advantage of lower capital gains rates, depending on how long you owned the vehicle.
To be fair, Uncle Sam lets you include the adjusted basis when calculating the taxable gain on your vehicle. For most people, this is the amount you paid for the car. If you received the car as a gift, use the same basis as the person giving you the car. If you've made improvements to the car, you get to add those costs. For example, if you had a new surround-sound speaker system added to crank out your favorite tunes, that bumps up your adjusted basis. However, ordinary repairs aren't considered improvements.
Calculating Your Taxable Gain
When you sell your car, only the portion of the selling price that exceeds the adjusted basis of the car is taxable gain. For example, if your car has an adjusted basis of $5,000 and you sell the car for $6,000, you have a gain of $1,000. However, unless you've got an old Mustang or other classic car, its unlikely that your car's value went up while you were driving it. If your basis is less than or equal to what you paid for the car, you don't have to include the income from the sale on your tax return.
Capital Gains Rates
If your car did appreciate while you owned it, the tax rate that you pay on the gain is determined by how long you held the car. If you held it for more than one year, you get to pay the lower, long-term capital gains rates on the taxable income, which are capped at 15 percent as of 2012. If you held it for less than one year, you're stuck with ordinary income tax rates based on your income bracket; these rates go as high as 35 percent.
Just because you have to pay taxes on gains doesn't mean Uncle Sam will reciprocate by allowing you to take a deduction if you sell the car for less than you paid. The tax code specifically prohibits you from taking a loss on personal property, which usually includes your vehicle. As much as you dream that some day a car will rise in value, unless you can show actual evidence that you held the car as an investment and not for personal use, you're not entitled to a deduction for the loss.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."