Capital Gains Tax Rate

The capital gains tax is the tax you pay on the sale of a non-inventory asset. This tax applies to the profit, not the gross income from the asset. The capital gains tax rate is different depending on whether the gain is a long or short-term capital gain.

Capital gains are profits from selling investments such as stocks, bonds, and real estate. They’re taxed differently than ordinary income.

Long-term capital gains are taxed at either zero, 15%, or 20%, depending on your total taxable income. These thresholds are adjusted annually to account for inflation.

What Is a Capital Gains

Capital gains tax is an income tax that applies to profits made from the sale of an investment asset. It applies to investors who own various properties such as stocks, bonds, and real estate.

Capital gains taxes come in two varieties: short-term and long-term. The rate for each depends on your taxable income and filing status.

Short-term capital gains refer to profits made from the sale of an investment asset held for less than one year. The rate of taxation on these gains is equal to your ordinary income tax bracket, which could be 0%, 15%, or 20%, depending on taxable income and filing status.

Long-term capital gains refer to profits from the sale of a capital asset you have owned for more than one year. Generally speaking, the tax rates on these gains are lower than those applicable to short-term profits.

Capital gains tax is a significant source of federal revenue, yet many people need insight into its effects on their finances or how to minimize taxes paid. Fortunately, some strategies can help reduce or eliminate your capital gains tax liability.

Short-Term Capital Gains Taxes

Capital gains taxes are applied to profits from selling investments such as stocks, real estate, or mutual funds. The amount you owe depends on the size of the gain, your federal income tax bracket, and how long you’ve owned the asset.

Short-term capital gains refer to profits earned from the sale of assets you’ve owned for one year or less, which typically carry a higher tax rate than long-term gains.

The most common short-term capital gains tax rate is 15%. However, depending on your income level, it could be as high as 35%.

There are a few exceptions to this rule, such as collectibles like coins, precious metals, and fine art. If you sell these items, your long-term capital gains will be taxed at a maximum rate of 28%.

These rates are lower than ordinary income tax rates and apply to many taxpayers. Furthermore, they can be offset by capital losses you can claim within one tax year.

Many people utilize 401(k), traditional IRA, or solo (401K) accounts to avoid paying capital gains taxes on their investment income. Alternatively, they may invest in a savings account that allows them to grow their money tax-deferred until retirement age when they withdraw it from the account.

Long-Term Capital Gains

Long-term capital gains refer to profits earned when selling assets such as stocks, real estate, or mutual funds that have been held for more than one year. These gains are taxed lower than ordinary income and usually reflect an asset’s adjusted basis.

The adjusted basis is the purchase price plus any commissions, fees, or improvements paid for an asset. It also includes gifts received or inherited from other people, such as stock transferred to you or property inherited.

Let us assume Jane purchased a stock fund for $1,000 two years ago and received a $50 commission. Her adjusted basis in the asset is now $1,050, and she sells it at a profit of $2,400.

Jane’s net long-term capital gain is $2,500, meaning she must pay taxes of 15% on the $1,050 she made from her sale. In 2023, an individual’s total taxable income must not exceed $44,625 to qualify for this rate; if you have more than that amount, your capital gains are taxed at 20%.

Federal Income Tax Brackets

Capital gains taxes are determined by the length of time an asset was held and your overall income. Generally, gains on investments held for more than one year are taxed at either 0%, 15%, or 20%, depending on which tax bracket you fall under.

In 2023, you won’t owe any federal income tax on long-term capital gains if your total taxable income is $44,625 or less. The rate increases to 15 percent for those earning $44,626 to $492,300; above this amount, the rate jumps to 20%.

High-income taxpayers have the option to use capital losses as a tax offset. These losses are carried forward into future years and can be used to reduce your ordinary income by up to $3,000 ($1,500 if married filing separately) annually.

There are a few exceptions to the general long-term capital gains tax rate, such as collectible assets like works of art, coins, antiques, stamps, wine, gold or silver, and historical objects. These items usually attract ordinary income taxes of up to 28%.

In addition to capital gains taxes, high-income individuals must pay an additional 3.8 percent net investment income tax (NIIT). This tax applies to individuals who make more than certain income thresholds from investment gains, dividends, interest, or other sources of revenue.

Exceptions to Capital Gains Taxes

Capital gains tax (CGT) is a tax that applies to profits earned from the sale of certain assets such as stocks, real estate, and mutual funds. Your rate for paying this tax depends on how much profit you made and how long you held onto an asset before selling it.

The general rule is that if you hold an asset for one year or less before selling it, any gain generated is considered short-term capital gains and taxed at ordinary income rates. However, there are exceptions to this rule.

For instance, if you own a home and use it as your principal residence, then any profits on that sale are generally exempt from capital gains taxes. This exemption applies to both individual taxpayers and married couples filing jointly.

You might be eligible to exempt a portion of your gain from taxes if you were forced to sell your main home due to work or personal reasons. With this exemption, you could save up to $250,000. Depending on your income level, this exemption could allow for an exemption of up to $250,000 from capital gains taxes.

In addition to this exception, you can exempt part of your gains from taxes if you’re retired and sell investments that have appreciated since purchase. For instance, if stock in a company has gone public and its value has increased, no capital gains tax would apply on the sale of those shares.

Capital gains tax strategies

Capital gains tax strategies can help investors reduce or avoid these taxes. These plans should be tailored to an individual’s financial situation and long-term objectives. Before making any decisions regarding your portfolio, consult a financial advisor and tax expert.

One way to reduce your overall taxable income is to take advantage of losses from underperforming investments. Essentially, you sell unprofitable security and write off the loss as a deduction against ordinary income – up to $3,000 annually ($1,500 for married taxpayers filing separately).

Another strategy is to repurchase shares of an investment that have appreciated during a sale, thus raising their cost. Doing this resets the investment’s profit-and-loss record, so you don’t pay capital gains tax on the original gain. Any future realized gains are calculated using this higher cost basis.

One way to reduce capital gains taxes is to donate appreciated stocks to a charity. Not only will you receive a tax deduction for the stock’s fair market value, but any profits earned by the charity won’t be subject to capital gains taxes.

Capital gains taxes: Quick facts

Capital gains when selling assets such as real estate, stocks, or mutual funds are taxed. Taxes depend on whether the gains are short- or long-term and your income level.

The first step to calculating your capital gain is establishing your basis and realized amount. Your basis is the purchase price minus any commissions or fees paid and may include reinvested dividends on stocks.

Once you have your cost basis and realized amount, subtract your foundation’s sales proceeds to determine your taxable gain. Depending on your tax bracket, this could range from 0% to 37% of your gain, with higher taxable income coming with increased rates.

Fortunately, you can take steps to reduce your tax liability before year-end. Two strategies that may help with this are tax loss harvesting and planned charitable giving.

Another way to reduce taxable capital gains is to wait until you sell an investment property or stock that has appreciated more than expected. This strategy, known as a wash sale, may be advantageous if your tax rate is low or your income is high.

While the long-term capital gain is taxed on its own at 0, 10, and 15 percent, the short term capital gain is taxed ordinarily. Therefore, the short-term capital gains will be added to your taxable income. This will make you pay taxes as if the capital gain were ordinary income from a job or business.

The short-term capital gains tax is paid if the asset is held for one year or less. The profit on the sale of the asset will be added to your taxable income, thus, you will be taxed at a rate according to the tax brackets.

Assume your taxable income is $100,000 and you’ve earned $20,000 by selling stocks. The profits from the $20,000 will be added to your taxable income and you will pay capital gains taxes that way. So, with short-term capital gains, there isn’t a specific tax rate.

If you hold an asset for more than one year, it will be considered as a long-term capital gain for tax purposes.

Related Article: 1031 Exchange Rules 2024

The long-term capital gains are taxed on their own rather than being added to taxable income. The rates are from 0 to 20 percent depending on adjusted gross income and filing status. You can see the below tables to see the tax rate that applies to each filing status.

Filing Status0%15%20%
Single$0 to $40,000$40,001 to $441,450$441,451 or more
Married Filing Jointly$0 to $80,000$80,001 to $496,600$496,601 or more
Married Filing Separately$0 to $40,000$40,001 to $248,300$248,3001 or more
Head of Household$0 to $53,600$53,601 to $469,050$469,051 or more

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