You earn a capital gain when you sell an investment or an asset for a profit. When you realize a capital gain, the proceeds are considered taxable income.
The amount you owe in capital gains taxes depends in part on how long you owned the asset. Long-term capital gains taxes are paid when you’ve held an asset for more than one year, and short-term gains apply to profits from an asset you’ve held for one year or less.
Long-Term Capital Gains Taxes
Long-term capital gains are taxed at lower rates than ordinary income. How much you owe depends on your annual taxable income. You’ll pay a tax rate of 0%, 15% or 20% on gains from the sale of most assets or investments held for more than one year.
When calculating the holding period—or the amount of time you owned the asset before you sold it—you should count the day you sold the asset but not the day you bought it. For example, if you bought an asset on February 1, 2023, your holding period started on February 2, 2023, the one-year mark of ownership would occur on February 1, 2024.
Long-term gains taxes apply to profits you make from selling capital assets, like stocks, bonds, or real estate, that you’ve held for more than one year. These rates are generally much lower than taxes on your regular income.
Here’s a breakdown of long-term gains taxes in the US (as of June 22, 2024):
- Rates: You’ll pay either 0%, 15%, or 20% depending on your taxable income and filing status.
- Most people qualify for the 15% rate.
- Benefits: Compared to ordinary income tax rates that can go up to 37%, long-term capital gains taxes offer a significant tax advantage.
- Net Investment Income Tax (NIIT): There’s an additional 3.8% tax that may apply to your long-term capital gains if your taxable income exceeds a certain threshold.
2023 Long-Term Capital Gains Tax Rates
Tax Filing Status | 0% Rate | 15% Rate | 20% Rate |
---|---|---|---|
Single | Taxable income of up to $44,625 | $44,625 to $492,300 | Over $492,300 |
Married filing jointly | Taxable income of up to $89,250 | $89,250 to $553,850 | Over $553,850 |
Married filing separately | Taxable income of up to $44,625 | $44,625 to $276,900 | Over $276,900 |
Head of household | Taxable income of up to $59,750 | $59,750 to $523,050 | Over $523,050 |
2024 Long-Term Capital Gains Tax Rates
Tax Filing Status | 0% Rate | 15% Rate | 20% Rate |
---|---|---|---|
Single | Taxable income of up to $47,025 | $47,026 to $518,900 | Over $518,900 |
Married filing jointly | Taxable income of up to $94,050 | $94,051 to $583,750 | Over $583,750 |
Married filing separately | Taxable income of up to $47,025 | $47,026 to $291,850 | Over $291,850 |
Head of household | Taxable income of up to $63,000 | $63,001 to $551,350 | Over $551,350 |
Short-Term Capital Gains Taxes
When you own an asset or investment for one year or less before you sell it for a profit, that’s considered a short-term capital gain. In the U.S., short-term capital gains are taxed as ordinary income.
That means you could pay up to 37% income tax, depending on your federal income tax bracket.
What Is a Capital Gain?
A gain happens when you sell or exchange a capital asset for a higher price than its basis. The “basis” is what you paid for the asset, plus commissions and the cost of improvements, minus depreciation.
There is no capital gain until you sell an asset. Once you’ve sold an asset for a profit, you’re required to claim the profit on your income taxes. gains are not adjusted for inflation.
Here’s how gains are calculated:
- Find your basis. Typically, this is what you paid for the asset, including commissions or fees.
- Find your realized amount. This will be what you sold the asset for, less any commissions or fees you paid.
- Subtract the basis from the realized amount. If your sale price was higher than your basis price, it’s a gain. If your sale price was less than your basis price, it’s considered a capital loss.
What Are Capital Losses?
Capital losses are when you sell an asset or an investment for less than you paid for it. Capital losses from investments can be used to offset your capital gains on your taxes.
Like gains, capital losses come in short-term and long-term varieties and must first be used to offset capital gains of the same type.
For instance, if you have long-term losses, they must first be used to offset any long-term capital gains. Any excess losses after that can be used to offset short-term gains. You also may use losses to offset up to $3,000 of other income, such as earnings or dividend income. Unused capital losses can be carried forward to future tax years.
How Are Capital Gains Taxes Calculated?
You can calculate gains taxes using IRS forms. To calculate and report sales that resulted in gains or losses, start with IRS Form 8949.
Record each sale, and calculate your hold time, basis, and gain or loss. Next, figure your net gains using Schedule D of IRS Form 1040. Then copy the results to your tax return on Form 1040 to figure your overall tax rate.
Exceptions to Capital Gains Taxes
For some kinds of gains, different rules apply. These include capital gains from the sale of collectibles (like art, antiques and precious metals) and owner-occupied real estate.
There aren’t exactly exceptions to gains taxes, but there are ways to reduce or eliminate them altogether. Here are some key strategies:
Home Sale Exclusion:
- This applies to your primary residence. You can exclude up to $250,000 of capital gains if filing single and $500,000 for married couples filing jointly.
- There are ownership and usage tests you must meet to qualify.
- You can only use this exclusion once every two years.
1031 Exchange:
- This defers gains taxes on investment properties.
- You must reinvest the proceeds from the sale into a like-kind property (similar investment property) of equal or greater value within a specific timeframe.
Capital Losses:
- losses from selling assets at a loss can be used to offset capital gains.
- Up to $3,000 of losses can be used to offset ordinary income each year.
- Any unused losses can be carried forward to future tax years.
Tax-Advantaged Accounts:
- Investing in retirement accounts like IRAs and 401(k)s allows your gains to grow tax-deferred or tax-free depending on the account type.
Holding Period:
- Assets held for more than one year qualify for long-term gains rates, which are generally lower than short-term capital gains rates (for assets held less than a year).
Capital Gains Taxes on Owner-Occupied Real Estate
If you sell your home for a profit, that’s considered a gain. But you may be able to exclude up to $250,000 of that gain from your income, or up to $500,000 if you and your spouse file a joint tax return.
To qualify, you must pass both the ownership test and the use test. This means you must have owned and used the real estate as your main home for a total period of at least two years out of the five years before the sale date. The two-year periods for owning the home and using the home don’t have to be the same two-year periods. Typically, you can’t take this exclusion if you’ve taken it for another home sale in the two years before the sale of this home.
Capital Gains Taxes on Collectibles
If you realize long-term gains from the sale of collectibles, such as precious metals, coins or art, they are taxed at a maximum rate of 28%. Remember, short-term gains from collectible assets are still taxed as ordinary income. The IRS classifies collectible assets as:
- Works of art, rugs and antiques
- Musical instruments and historical objects
- Stamps and coins
- Alcoholic beverages (think valuable old wine)
- Any metal or gem
The latter point is worth reiterating: The IRS considers precious metals to be collectibles. That means long-term gains from the sale of shares in any pass-through investing vehicle that invests in precious metals (such as an ETF or mutual fund) are generally taxed at the 28% rate.
What Is the Net Investment Income Tax?
For people earning income from investments above certain annual thresholds, the net investment income tax comes into play.
Net investment income includes capital gains from the sale of investments that haven’t been offset by losses—as well as income from dividends and interest, among other sources. The net investment income tax an additional 3.8% surtax.
Who Owes the Net Investment Income Tax?
Individuals, estates and trusts with income above specified levels own this tax on their net investment income. If you have net investment income from capital gains and other investment sources, and a modified adjusted gross income above the levels listed below, you will owe the tax.
Filing Status | Threshold Amount |
---|---|
Single or head of household (with qualifying person) | $200,000 |
Married filing jointly | $250,000 |
Married filing separately | $125,000 |
Qualifying widow(er) with dependent child | $250,000 |
Disclaimer ||
The Information provided on this website article does not constitute investment advice,financial advice,trading advice,or any other sort of advice and you should not treat any of the website’s content as such.
Always do your own research! DYOR NFA
Coin Data Cap does not recommend that any cryptocurrency should be bought, sold or held by you, Do Conduct your own due diligence and consult your financial adviser before making any investment decisions!
Leave feedback about this