The future of capital gains taxes

Investors looking to make some portfolio moves are anxiously awaiting the lame-duck session of Congress. What lawmakers decide regarding the capital gains tax rates will determine how many of us sell some of our assets now or wait a bit longer.

Right now, the long-term capital gains tax rate is 15 percent for folks in the 25 percent and higher tax brackets. Note "long-term." This means you've owned the asset for more than a year before you sell it.

And investors with income in the 10 percent and 15 percent brackets don't owe Uncle Sam anything on profits from assets they sell after holding them for 366+ days.

On Jan. 1, 2011, however, investment tax bills could be bigger.

UPDATE Nov. 1, 2012: The capital gains tax rates and other Bush-era tax cuts were continued through 2012. What is recounted in this post is scheduled to occur on Jan. 1, 2013, if Congress and the president can't reach an agreement regarding the tax laws' expiration.

The top tax rate on long-term capital gains goes back to 20 percent for most taxpayers and 10 percent for those in the 15 percent tax bracket.

Although the greatest tax benefit goes to those in the lower income brackets, most investors are in the upper income tiers. And even with the lower 15 percent rate, the volume of their transactions still provide a nice chunk of tax revenue to the Treasury.

Will investors be as eager to make portfolio moves in a couple of months if they then face higher tax rates?

Or will they make the bulk of their taxable transactions before Dec. 31 to lock in the 15 percent rate? This will give the Treasury a short-term, year-end boost that could be larger than normal. But will it also mean that Uncle Sam will lose out on some taxes in at least the near future?

How will the stock market react to those mass tax-law-inspired moves? And what will that mean to the economy?

Congress must weight those factors, among others, in determining whether to keep these historically low capital gains tax rates.

What is a capital gain? The future of the gains tax law is not a new concern. It's been on investors' minds ever since the Bush tax cuts, with their sunset dates, were enacted.

But I got to thinking about this tax again today after I ran across a nifty graphic from Mint.com.

That's an excerpt of it above. You can check out the full What Are Capital Gains? visual decription for a walk-through of the process.

As the Mint feature and my Bankrate.com capital gains tax rates story explain, there's a lot more to this investment tax than just zero and 15 percent rates.

Related posts:

• Capital gains tax: Past, present, future
• Taking the sting out of stock losses at tax-filing time
• Special investment taxes: mutual fund capital gains and 'Flash Crash' earnings
• Capital loss deduction increase proposed
• Coping with the tax cost of mutual funds
• Expiring tax cuts might just do that

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