Almost any personal asset that you own has a cost associated with it. Typically, this is the amount you pay the cashier while they silently judge you for your obsession with mozzarella sticks. In the case of more durable objects, there is the potential that someone in the future might pay you more than your purchase price to take them off your hands, provided they weren’t put in the air fryer for six minutes. The most common examples are stocks, bonds, and real estate, but can include goods ranging from cars to stamps. The amount you paid for the asset is the basis, which is typically static but can be adjusted by things like improvements or depreciation. When the asset is sold, you subtract the basis from the sale price to come up with the capital gain. How that capital gain is taxed by the IRS is dependent on two things. The first is how long you owned the asset in question. If you held it for a year or more, you’re going to pay long-term capital gains tax, which is a preferential rate. If you held it for a less than a year, you’re going to pay ordinary income tax, just like you would on any wages, pension, or IRA income. The second factor is your adjusted gross income, and to explain how that works we need to briefly explain how tax brackets work. Tax brackets are kind of like a row of buckets. Any income you receive in a year goes into the buckets in order; first the 10% bucket, then the 12% bucket, and so on. You have to fill up each bucket before income “spills over” into the next one. You pay the 10% rate on the amount in the 10% bucket, and pay the 12% rate only on the income in the 12% bucket. In no case does earning extra income cause all of your… | Read More »