Quiz: Do you know How the Capital Gains Tax Works?

By: Staff
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About This Quiz

Most Americans have a healthy fear of the Internal Revenue Service. We all want to know how to reduce our income tax, including the dreaded capital gains tax. This quiz will help you navigate the slippery slopes the capital gains.

You are charged capital gains tax when you _____ an asset.

Even if you bought your home for $100,000 and an appraiser has recently valued it at $200,000, you will not owe capital gains tax until you sell it.

If you have a capital gain, your selling price is __________ your purchase price.

If you sell an asset for a price that is higher than the original purchase price, you have realized a capital gain. If you sell it for less, you have a capital loss.

The capital gains tax applies to any money earned from __________.

If you've earned money this year from the sale of real estate, stocks, or other valuable assets, you will have to pay a capital gains tax on your profit.

Which of the following types of income is investment income?

Stocks, bonds, options, stock dividends and real estate trusts are all examples of investment income that are subject to capital gains tax when they are sold.

Which type of proceed indicates how much you earn before deducting any commissions or fees?

Net proceeds are the amount of money you earned from the sale of securities, minus any expenses such as brokerage commissions and fees.

Which 1997 United States tax law governs tax breaks on capital gains?

If you are planning to sell your primary residence, the Taxpayer Relief Act of 1997 offers you significant tax breaks.

In America, how much money can married couples exclude in capital gains from the sale of their home?

Married couples who file jointly can exclude up to $500,000 in capital gains from the sale of their primary residence. Individuals can exclude up to $250,000.

What is the original purchase price of an investment called?

If you bought the investment yourself, then the cost basis is the price you paid for it.

What is the cost basis of an investment you receive as a gift?

Unless the value decreased before you received it, the cost basis of an investment you receive as a gift is the same as the original price.

What is the term for the period in which you've owned an asset?

There are three categories of holding periods -- short-term, long-term and super-long-term -- and each has a different tax rate.

Investments that are sold less than a year after they were bought are known as what?

If you buy and sell an asset in a year, it's considered a short-term investment. If you hold an asset for at least a year before selling, it is considered a long-term investment.

How long must super-long-term investments must be held after the original purchase?

Super-long-term investments must be held for more than five years before selling, and this category only applies to investments bought after Jan. 1, 2001.

Which factor is the most important in determining your capital gains tax on a given asset?

The more money you earn and the higher your income tax bracket, the higher the capital gains tax you will pay. In the case of short-term investments, you will be taxed at the same rate as your income tax.

Capital gains tax on short-term investments is usually _________ long-term investments.

Tax rates differ for short- and long-term investments and according to the type of asset you're selling. Short-term rates are generally higher than long-term rates.

Taxpayers in the 15 percent tax bracket will pay ________ on long-term capital gains.

As of 2008, if you were in the 15 percent tax bracket, you paid only 5 percent tax on long-term capital gains, but that rate dropped to zero in the 2008 tax year. Everyone paid a flat rate of 15 percent.

What is the long-term capital gains rate for collectible items?

No matter what your tax bracket, you will pay a flat rate of 28 percent on capital gains on collectibles.

In the U.S., which tax form do you use to report capital gains and losses?

Report your capital gains earnings, losses and taxes owed on the Schedule D: Capital Gains and Losses form.

Which type of investment will help you save on your capital gains tax bill?

To lower the amount you owe in capital gains tax, stay away from short-term investments. This is especially true if you belong to the lowest tax brackets, in which the tax rate is zero on long-term capital gains on most securities.

Can you deduct a capital loss from your income to reduce your total taxable income?

You can deduct capital losses from your capital gains to lower your taxable earnings, carrying over the losses for up to seven years.

What's a legal way to avoid paying high capital gains tax ?

You can legally shelter your income in tax-deferred retirement accounts like 401(k)s, Roth IRAs and traditional IRAs. As long as any money earned from the sale of a security is reinvested in another security, you can buy, sell and exchange them without being charged any capital gains tax.

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