The advantage of capital gains, as opposed to ordinary income, is that the basic maximum tax rate on capital gains for property held for more than one year is currently 15 percent through the end of 2010. In contrast, the top four ordinary income tax rates are all higher than this, with the top rate through 2010 at 35 percent.

Work Smart Capital gains rates are, like anything else, always subject to change. This is especially true in recent years where there have been a number of tax law changes made. In 2003, Congress lowered the maximum dividend and capital gains tax rates for most (but not all) dividends and capital gains 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 As originally enacted, these tax rate cuts were temporary and were scheduled to expire at the end of 2008.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. So as a quick reference, keep in mind that for tax years ending on or after May 6, 2003, and through the end of 2010, up to four different rates could apply to long-term capital gains: 28 percent for collectible gain and gain on qualified small business stock, 25 percent for unrecaptured gain from the sale of certain depreciable realty, 15 percent for other gain, or five percent for other gain for taxpayers in the 10 percent or 15 percent income tax rate brackets. For tax years 2008 through 2010, the five percent rate is reduced to zero.

There are some situations where other rates will apply to gains on certain types of property.

The long-term capital gains rate on business or investment real estate (called "section 1250 property" on the tax forms) will be 25 percent up to the amount of depreciation on the property while you owned it. However, there are no losses counted in the 25 percent rate group and any loss from this group must be taken into account in computing net gain or loss in the 15 percent rate group. Also, the long-term capital gains rate on collectibles such as art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines, or antiques is 28 percent.

For small business owners, capital gains have another advantage worth mentioning. Unlike the money you earn in your business, capital gains are not subject to the 15.3 percent self-employment tax. However, if a major activity of your business is buying or selling property that would be capital gains property in the hands of the average taxpayer -- for example, you're a dealer in coins or stamps, or you're a real estate developer -- you will have to treat your gains on sales as ordinary business income, reported on Schedule C rather than Schedule D. In that case, you would be subject to self-employment tax on these gains.