Quick Quiz:

If Rhode Island law does not change, will the state capital-gains tax disappear next year?

No.

But if you’ve been listening to the sound bites amid the budget battle at the State House, you’d think that, under current law, Rhode Island will no longer have a capital-gains tax come January.

That’s simply not true. Whether you’ll have to pay a state capital-gains tax will depend mainly on how long you’ve held the asset.

If you’ve held the asset for more than five years, you’ll escape tax on the profit — the “gain” — starting next year.

But if you’ve held the asset for five years or less, you’ll still have to pay a state capital-gains tax next year.

And if you’ve held the asset one year or less, you’ll have to pay a whopping tax to Rhode Island.

Here’s a quick look at how all this works:

Short-Term: If you’ve held the asset for 12 months or less, the gain is generally treated as ordinary income, such as salary or wages. So it generally gets taxed at the usual Rhode Island income-tax rates, as high as 9.9 percent.

So suppose that Rich Uncle Pennybags makes $1 million in profit from the sale of some stock that he’s owned for 10 months.

How much in Rhode Island capital-gains tax will he pay?

Nearly $100,000.

That’s true today.

That’ll also be true next year.

Medium-Term: If you’ve held the asset for more than 12 months, but less than five years, you generally pay a maximum Rhode Island tax of 5 percent if you’re an upper-income taxpayer, 2.5 percent if you’re a lower-income taxpayer.

That’s true today.

It’ll also be true next year.

Long-Term: If you’ve held the asset for more than five years, you currently pay tax at a maximum rate of 1.67 percent if you’re an upper-income taxpayer, 0.83 percent if you’re a lower-income taxpayer.

Under current law, these long-term rates will drop to zero starting in January, said Peter L. Chatellier, president-elect of the Rhode Island Society of Certified Public Accountants.

But the other capital-gains tax rates won’t change, said Chatellier, partner in Braver P.C., a regional accounting firm with an office in Providence.

In other words, under existing law, the Rhode Island capital-gains tax rates are “going away [only] for assets held more than five years . . . . Everything else stays the same,” he said. “That’s an important distinction.”

So the sound bites are wrong.

Rhode Island will still have a capital-gains tax in full force next year. It determines the tax you’ll pay on profit from the sale of stocks, mutual fund shares, land or other such assets held for investment, just as it does now.

The only issue is whether the rate on long-term assets – those held more than five years – will stay the same or drop to zero.

Under a proposed budget approved June 8 by the House Finance Committee, those long-term rates would stay the same next year; they wouldn’t disappear.

Either way, however, Rhode Island will still have a capital-gains tax regime in place next year. That’s an important point to keep in mind as the budget debate continues today before the House.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

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