Tax Rate on Capital Gains

Business property that is held for one year or less is considered to be held on a short-term basis. If you sell, scrap, retire, or otherwise dispose of a short-term capital asset, any related gains will be taxed at your ordinary income tax rate.

However, if the property was held for more than one year, gains on it will generally be treated as long-term capital gains. While property used in a trade or business is technically not a "capital asset," in the IRS's view, the tax laws do apply the more favorable capital gains tax rates to this property.

In 2003, Congress lowered the maximum dividend and capital gains tax rates for most (but not all) dividends and capital gains from 20 to 15 percent for qualifying taxpayers. Taxpayers in the 10- and 15-percent tax brackets are eligible for an even lower rate of five percent. In 2008, the rate for taxpayers in the 10- and 15-percent tax brackets falls to zero.

As originally enacted, these tax rate cuts were temporary and were scheduled to expire at the end of 2008. However, the Tax Increase Prevention and Reconciliation Act of 2005 extends the cuts for two more years through December 31, 2010.

Extending this tax break represents a significant tax cut for many of those affected. Once the extension ends in 2011, capital gains will effectively be taxed at a 33.33 percent higher rate (20 percent instead of 15 percent).

Exceptions to capital gains treatment. An important exception to the special rate for capital gains is any gain that represents recaptured depreciation. Also, in some cases sales to close family members or controlled business entities might not be eligible for capital gains treatment, or for deduction of a capital loss.