What’s considered a capital gain?
A capital gain is a profit you make when you sell an asset for more than you paid for it. The IRS classifies different types of investments into different categories, and each category has its own set of rules for how the profits are taxed. For example, real estate and collectibles, including art and antiques, fall under special capital gains rules.
The Tax Cuts and Jobs Act (TCJA) altered the tax treatment of long-term capital gains. Before 2018, long-term capital gains tax levels were closely matched with income tax brackets. The TCJA established new long-term capital gains tax brackets, and these figures typically fluctuate yearly.
What is short-term capital gains tax?
Short-term capital gains tax is a tax levied on profits from the sale of an asset held for one year or less. The tax rate equals your ordinary income tax rate, which is the tax you pay on your regular income.
For instance, if you are in the 28% income tax bracket, your short-term capital gains rate would also be 28%.
|Up to $10,275||$10,276 to $41,775||$41,776 to $89,075||$89,076 to $170,050||$170,051 to $215,950||$215,951 to $539,900||Over $539,900|
|Up to $14,650||$14,651 to $55,900||$55,901 to $89,050||$89,051 to $170,050||$170,051 to $215,950||$215,951 to $539,900||Over $539,900|
|Up to $20,550||$20,551 to $83,550||$83,551 to $178,150||$178,151 to $340,100||$340,101 to $431,900||$431,901 to $647,850||Over $647,850|
|Up to $10,275||$10,276 to $41,775||$41,776 to $89,075||$89,076 to $170,050||$170,051 to $215,950||$215,951 to $323,925||Over $323,925|
What is a long-term capital gains tax?
Long-term capital gains tax is a tax on the profit from selling an asset, and it is applied to the profits from selling assets held for more than one year. The tax is levied at a rate of 20 percent for most purchases.
The long-term capital gains tax rate is 0%, 15%, or 20%, depending on your taxable income and filing status. Generally, the capital gains tax brackets are lower than short-term capital gains tax rates.
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $41,675||$41,676 to $459,750||Over $459,750|
|Head of household||Up to $55,800||$55,801 to $488,500||Over $488,500|
|Married filing jointly||Up to $83,350||$83,351 to $517,200||Over $517,200|
|Married filing separately||Up to $41,675||$41,676 to $258,600||Over $258,600|
Whether you are additionally required to pay capital gains taxes to the state is location-dependent. Capital gains are also taxed in certain states, while others have no taxes or impose preferential treatment for them.
The following states do not tax income and therefore do not tax capital gains:
- New Hampshire
- South Dakota
Numerous states provide a credit, deduction, or exemption. Colorado, for example, provides an exemption for real or physical property, whereas New Mexico provides a deduction for federally taxable profits. Montana offers a credit that residents can use to offset a portion of any capital gains tax.
Key differences between long-term and short-term capital gains tax
Short-term capital gains are taxed as ordinary income, subject to the marginal income tax bracket you fall under. Long-term capital gains are taxed at a more favorable rate than short-term capital gains, meaning you can minimize your capital gains tax by holding assets for a year or more.
The most crucial difference between long-term and short-term capital gains is how the net capital gains are calculated. An adjusted basis is used to calculate the gain or loss, and this takes into account certain things like depreciation or investments in a property. When an asset is gifted to you, you inherit the donor’s basis rather than calculating it yourself.
Capital assets include stocks, bonds, precious metals, jewelry, and real estate. When you sell a capital asset for more than the original purchase price results in a capital gain.
Selling a capital asset after owning it for less than a year results in a short-term capital gain taxed as ordinary income.
Advantages of the long-term capital gains
You have made a capital gain when you sell an investment for more than you paid for it. If you hold the investment for less than a year, your capital gain is considered short-term and is taxed at your regular income tax rate. However, if you hold the investment for more than a year, your capital gain is deemed to be long-term and is taxed at a lower rate.
The main advantages of long-term capital gains are the ability to defer taxes on the earnings until later and having more flexibility in how you invest your money. This can be a significant advantage, especially if you’re looking to reinvest your profits back into more assets. In addition, long-term capital gains also have a lower tax rate than short-term capital gains.
How do I pay capital gains taxes?
There are two ways to pay capital gains taxes:
- You can pay capital gains taxes in the year of the sale
- You can pay capital gains taxes on your annual tax return
You must pay estimated quarterly taxes on any capital gains you have made in the current year.
There are two capital gains tax brackets – short term and long term and the income cut-offs for each bracket vary based on your filing status and adjusted gross income (AGI).
You must report any capital gains or losses on Schedule D of Form 1040 (your tax return).
Capital gains are taxed at different rates depending on the type of asset you sold, your taxable income, and whether or not you are married filing jointly with a spouse who has an income above a certain threshold.