# Capital Gains Tax

The capital gains tax is the tax you pay for the sale of a non-inventory asset. Selling stocks, bonds, real estate, and other types of properties for a profit can make you pay capital gains tax. The capital gains tax is calculated differently depending on how long you’ve held the asset and the portion of tax subject to your profit depends on your taxable income.

Here is a summary of how to calculate capital gains tax.

## Ordinary income through sales of stocks, bonds, etc.

For a taxpayer to pay capital gains tax, the asset must have been held for more than one year. If the asset was held for less than a year and it was sold at a profit, the profit earned is subject to ordinary taxation.

What this means is that the profit is added to the gross income of the taxpayer and isn’t taxed separately than the other income earned. For example, if your gross income earned from your business or employment is \$50,000 and the profit from the stocks sold during the tax year is \$5,000, your gross income is going to be totaled at \$55,000. So, your profit is taxed as ordinary income.

## Calculating capital gains tax

As mentioned, the profit earned from the sale of assets that were held for one year or more are taxed as capital gains. The capital gains tax is \$0 for certain individuals and as high as 20 percent for others. It all comes down to the taxable income of the taxpayer. Take note that the capital gains tax rate has nothing to do with your adjusted gross income or the gross income you’ve earned. The capital gains tax rate is purely based on the portion of your income that’s subject to taxation.

The capital gains tax rate is between 0 and 20 percent with another 15 percent in the middle. So, depending on your taxable income, you can pay 0 percent, 15 percent, or 20 percent of the profit earned from the sale of long-term capital gains in taxes.

The above table is the taxable income brackets for determining the capital gains tax rate.

## How to pay less tax with capital gains?

Paying less tax with capital gains is easy. If you hold an asset for less than one year and sell it for a profit, the income earned will be taxed as ordinary income. So, there is a high chance that you will pay more in taxes. Instead, hold the assets for at least one year and when you sell for a profit, you won’t pay as high in taxes as the maximum is 20 percent.

Even if you’re at the highest tax bracket (37 percent), your capital gains tax rate is capped at 20 percent. It’s always good to hold the assets for more than one year to pay capital gains tax on the income as ordinary income is taxed at a higher rate.