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This question refers to 1040 tax form for 2015 on http://www.irs.gov/pub/irs-dft/f1040--dft.pdf

Am I understanding this correctly?:

Capital gains (on line 13) is part of total income (on line 22). So capital gains is often taxed twice:

1) taxed as captial gains (which can be taxed at 0%, 15%, or 20%)
2) capital gains is added to total income

If total taxable income is greater than 0, then capital gains is taxed as capital gains and again as income.

If total taxable income is 0, then both capital gains and income are taxed at a 0%.

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    The way it work in Australia is that you only pay CGT on 50% of the long term capital gains for assets held over 12 months. So if you sell an asset you have owned for more than 12 months only half the amount of capital gains gets added to your other income, if you sell an asset held less than 12 months the full capital gains gets added to your other income. Then you just pay tax based on your total income once. It should work similar to this in the US. – user9822 Oct 2 '15 at 22:26
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Short-term capital gains are taxed as regular income only. There is no special tax treatment for them.

Long-term capital gains get the preferred rates. It's not easy to track how this happens on the form, but it basically goes like this (line numbers refer to year 2014 forms):

  • On Schedule D (Form 1040) you'll have segregated long and short term capital gains.
  • When you get to Schedule D, line 16, you will (as you said) include all of your gains on Form 1040, line 13 as part of your total inclome.
  • You'll continue down to Schedule D, line 20, check the box "yes" and then have to complete the "Qualified Dividends and Capital Gain Worksheet" in the instructions for Form 1040 to compute your tax that you ultimately enter on line 44 of Form 1040.

When you do that worksheet, it will make the corrections in tax for both qualified dividends and long-term capital gains. This means that the tax on line 44 that you pay won't match what you'd get from using the tables based just on the income number that you put on line 13.

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