Capital gains tax rates are dependent on income and how long you keep an asset before selling.
Short-term capital gains can be taxed as ordinary income, according to your federal tax bracket.
Long-term capital gains are generally taxed at 0% or 15% or 20%. However, it is possible to get as high as 25% and 28%.
Luis Rosa, an expert in Personal Finance Insider’s tax review board, reviewed this article for accuracy and clarity.
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If you earn money from the sale of a capital asset — your home, part of a business, stocks, or bonds, for example — that profit may be subject to
Capital gains come in two types: short term (assets that are held for less than a year) or long term (assets that are held for more than a year). The day that you acquire the asset and the day that you sell it are not included in the holding period.
Any net gain that results from the sale of an asset for a short-term period will be added as part of your gross income. This income will be taxed at ordinary rates between 10% to 37%. Long-term net gains are generally taxed at 15% to 20%, depending on your total taxable earnings.
What is the capital gains tax?
Capital gains tax is generally favorable. It will not be higher than what you would pay on ordinary income. Your federal income tax bracket has the same short-term capital gains rates.
The long-term capital gain rates range from 0% up to 20% for 2021, 2022, and other special circumstances are exempt. Capital gains from long-term sales of collectibles, such as fine art and coins, are subject to 28% tax. Certain gains from real property can be subject to 25% tax.
Quick tip: The current long term capital gains rates, except for the highest rates applicable to collectibles or real estate, have been in effect since 2013. These rates are adjusted each year to reflect inflation.
Here are the 2021 federal long-term capital gain income brackets:
Here are the 2022 federal long-term capital gain income brackets:
Note: Taxable income refers to your income after taking all deductions.
Here are the federal shortterm capital gains rates (for 2021), which are the same rate as your ordinary income rates.
Here are the federal short term capital gains rates for 2022
How do you calculate capital gain?
Each capital asset you own has an initial basis. This is the amount you paid to purchase the property, plus any taxes and commissions. For those who received the asset as a gift or inheritance, there is a special calculation that calculates your adjusted tax base.
Simply subtract the proceeds received at the date of sale from your adjusted tax base to calculate the amount of gain or loss. If the proceeds are greater than your basis, then you’ll earn a gain. You’ll lose if your basis is less than the proceeds.
Your net capital gains are subjected to the capital gains taxes rates Capital losses from the previous year, or capital losses in the current tax year, may be used to offset your gains.
Example of how capital gains tax works
For example, let’s say you had a $2,000 capital loss from the sale of a stock you held for 18 months — that’s a long-term capital loss. Additionally, you also gained $3,000 from the sale of another stock held for 24 months.
Both assets were long-term and can be compared: $3,000 gain – $2,000 Loss = $1,000 net Gain Taxed at long term capital gains rates
Let’s say your 2021 taxable income was $50,000. You file your tax return as a single. Capital gains are subject to 15% tax, unless the asset you own is real estate or a collectible.
How do I pay capital gains taxes?
You may have to pay quarterly estimated taxes if you sell an asset that has generated a large capital gains. To calculate your capital gains tax, you can answer a few questions on the IRS website.
Use Form 8949 to calculate your year’s net gain or loss. Tax software will do the math automatically so you don’t have to do it. Then, you can report any capital gains and losses on Schedule D (your tax return).
What is the Net Investment Income tax?
If you have substantial financial resources,
— including capital gains passive income, certain annuities, dividends, interest, rents, and royalties — you may have to pay an additional tax that goes toward supporting America’s healthcare program.
If your modified adjusted Gross Income (AGI), is greater than the following amounts, then the Net Investment Income tax applies a flat 3.8% rate to your investment income.
Married filing jointly, qualifying widow(er), $250,000 or more. Married filing separately: $125,000 and more. Single and head of household: $200,000 and more
If you hold an investment for more than 12 month, you will owe less taxes than if the asset was bought and sold within one calendar year.
The federal tax rate for long-term capital gains will be 15% for the vast majority of investors. Capital gains are considered ordinary income in most states. This applies regardless of whether they are short-term or long-term. Strategically selling investments at a loss may lower the gain that you are taxed on because the gains are netted.
Tanza is a CERTIFIED FINANCIAL PLANNER™ and former correspondent for Personal Finance Insider. She wrote about taxes, wealth building, retirement, taxes, and managing debt. She was the editor of a biweekly newsletter as well as a column answering readers’ questions about money.
Tanza is the author two ebooks, “A Guide to Financial Planners” and “The One Month Plan to Master Your Money.”
2020 was Tanza’s year as the editorial lead for Master Your Money. This original series, which lasted one year, provided financial tools, advice and inspiration to millennials.
Tanza joined Business Insider June 2015, and is a graduate of Elon University where she studied journalism as well as Italian. She is based Los Angeles.