When you sell a capital asset for more than its original purchase price, the result is a capital gain. Capital assets include stocks, bonds, precious metals, jewelry, and real estate. The tax that you’ll pay on the capital gain depends on how long you held the asset before selling it. Capital gains are classified as either long- or short-term and are taxed accordingly.
It’s important to keep capital gains taxes in mind whenever you sell an asset, especially if you dabble in day trading online. First, any profits that you make are taxable. Second, you may have heard that capital gains are taxed more favorably than other types of income, but that’s not always the case. As mentioned above, it depends on how long you owned those assets before you sold them.
Long-term capital gains are derived from assets that are held for more than one year before they are disposed of. Long-term capital gains are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%. The tax rate on most taxpayers who report long-term capital gains is 15% or lower.
Short-term capital gains are taxed just like your ordinary income. That’s up to 37% in 2021, depending on your tax bracket.
- 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, which is taxed as ordinary income.
- Long-term capital gains result from selling capital assets owned for more than one year and are subject to a tax of 0%, 15%, or 20%.
- There is a flat 28% capital gains tax on gains related to art, antiques, jewelry, precious metals, stamp collections, coins, and other collectibles regardless of your income.
The Difference Between Short-Term and Long-Term
A short-term capital gain results from the sale of an asset owned for one year or less. While long-term capital gains are generally taxed at a more favorable rate than salary or wages, short-term gains do not benefit from any special tax rates. They are subject to taxation as ordinary income.
As regular taxable income, short-term gains are subject to whichever marginal income tax bracket you fall under. There are currently seven U.S. federal tax brackets, with rates ranging from 10% to 37%.
Net capital gains are calculated based on your adjusted basis in an asset. That is the amount that you paid to acquire the asset, less depreciation, plus any costs that you incurred during the sale of the asset and the costs of any improvements that you made. If an asset is given to you as a gift, then you inherit the donor’s basis.
The tax on a long-term capital gain is almost always lower than if the same asset is sold and you realize the gain in less than a year. Because long-term capital gains are generally taxed at a more favorable rate than short-term capital gains, you can minimize your capital gains tax by holding assets for a year or more.
Long-Term Capital Gains Tax Rates
After the passage of the Tax Cuts and Jobs Act (TCJA), the tax treatment of long-term capital gains changed. Before 2018, the tax brackets for long-term capital gains were closely aligned with income tax brackets. The TCJA created unique tax brackets for long-term capital gains tax. These numbers generally change from year to year.
|Tax Rates for Long-Term Capital Gains 2021|
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $40,400||$40,401 to to $445,850||Over $445,850|
|Head of household||Up to $54,100||$54,101 to $473,750||Over $473,750|
|Married filing jointly||Up to $80,800||$80,801 to $501,600||Over $501,600|
|Married filing separately||Up to $40,400||$40,401 to $250,800||Over $250,800|
Source: Internal Revenue Service
|Tax Rates for Long-Term Capital Gains 2022|
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $41,675||$41,676 to 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|
Source: Internal Revenue Service
Short-Term Capital Gains Tax Rates
Short-term capital gains are taxed as though they are ordinary income. Any income that you receive from investments that you held for less than a year must be included in your taxable income for that year. For example, if you have $80,000 in taxable income from your salary and $10,000 from short-term investments, then your total taxable income is $90,000.
The tax that you’ll pay on short-term capital gains follows the same tax brackets as ordinary income.
|Tax Rates for Short-Term Capital Gains 2021|
|Single||Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,426 to $523,600||Over $523,600|
|Head of household||Up to $14,200||$14,201 to $54,200||$54,201 to $86,350||$86,351 to $164,900||$164,901 to $209,400||$209,401 to $523,600||Over $523,600|
|Married filing jointly||Up to $19,900||$19,901 to $81,050||$81,051 to $172,750||$172,751 to $329,850||$329,851 to $418,850||$418,851 to $628,300||Over $628,300|
|Married filing separately||Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,426 to $314,150||Over $314,150|
Source: Internal Revenue Service
|Tax Rates for Short-Term Capital Gains 2022|
|Single||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|
|Head of household||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|
|Married filing jointly||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|
|Married filing separately||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|
Source: Internal Revenue Service
Ordinary income is taxed at graduated rates depending on your income. It’s possible that a short-term capital gain (or at least part of it) might be taxed at a higher rate than your regular earnings. That’s because it might cause part of your overall income to jump into a higher marginal tax bracket.
In our above example, using the 2021 federal income tax rates, and assuming you are filing that income as a single person, you would be in the 22% tax bracket with your taxable income from your salary. However, because of the progressive nature of the federal tax system, the first $9,950 that you earn would be taxed at 10%, your income from $9,951 up to $40,525 would be taxed at 12%, and only the income from $40,526 to $86,375 would be taxed at 22%.
Part of your $10,000 capital gain—the portion up to the $86,375 limit for the bracket—would be taxed at 22%. The remaining $3,625 of the gain, however, would be taxed at 24%, the rate for the next highest tax bracket.
Make sure you consult an accountant or other financial professional who can help guide you through the process if you have trouble understanding how capital gains affect your tax bracket and overall tax liability.
Capital Gains and State Taxes
Whether you also have to pay capital gains to the state depends on where you live. Some states also tax capital gains, while others have no capital gains taxes or favorable treatment of them. The following states have no income taxes, and therefore no capital gains taxes:
- New Hampshire
- South Dakota
Several states offer either a credit, deduction, or exclusion. For example, Colorado offers an exclusion on real or tangible property and New Mexico offers a deduction on federally taxable gains. Montana has a credit to offset part of any capital gains tax.
Capital Gains Special Rates and Exceptions
Some assets receive different capital gains treatment or have different time frames than the rates indicated above.
You’re taxed at a 28% rate—regardless of your income—for gains on art, antiques, jewelry, precious metals, stamp collections, coins, and other collectibles.
Qualified Small Business Stock
The tax treatment of a qualified small business stock (QSB) depends on when the stock was acquired, by whom, and how long it was held. To qualify for this exemption, the stock must have been acquired from a QSB after Aug. 10, 1993, and the investor must be a non-corporate entity that held the stock for at least five years.
A QSB is generally defined as a domestic C corporation with aggregate gross assets that have never exceeded $50 million at any point since Aug. 10, 1993. Aggregate gross assets include the amount of cash held by the company, as well as the adjusted bases of all other property owned by the corporation. Additionally, the QSB must file all required reports.
Only certain types of companies fall under the category of a QSB. Firms in the technology, retail, wholesale, and manufacturing sectors are eligible as QSBs, while those in the hospitality industry, personal services, financial sector, farming, and mining are not.
This exemption originally allowed the taxpayer to exclude 50% of any gain from the sale of the qualified small business stock. However, it was later increased to 75% for QSB stock acquired from Feb. 18, 2009, to Sept. 27, 2010, and then to 100% for QSB stock acquired after Sept. 27, 2010. The gain that is eligible for this treatment has a cap of $10 million, or 10 times the adjusted basis of the stock—whichever is greater.
Owner-Occupied Real Estate
There’s a special capital gains arrangement if you sell your principal residence. The first $250,000 of an individual’s capital gains on the sale of your principal residence is excluded from taxable income ($500,000 for those married filing jointly), as long as the seller has owned and lived in the home for two of the five years leading up to the sale. If you sold your home for less than you paid for it, this loss is not considered tax-deductible, because capital losses from the sale of personal property, including your home, are not tax-deductible.
For example, a single taxpayer who purchased a house for $300,000 and sold it for $700,000 made a $400,000 profit on the sale. After you apply the $250,000 exemption, they must report a capital gain of $150,000. This is the amount subject to the capital gains tax.
In most cases, significant repairs and improvements can be added to the base cost of the house. These can serve to further reduce the amount of taxable capital gain. If you spent $50,000 to add a new kitchen to your home, this amount could then be added to the $300,000 original purchase price. This would raise the total base cost for capital gains calculations to $350,000 and lower the taxable capital gain from $150,000 to $100,000.
Investment Real Estate
Investors who own real estate are often allowed to apply deductions to their total taxable income based on the depreciation of their real estate investments. This deduction is meant to reflect the steady deterioration of the property as it ages, and it essentially reduces the amount that you’re considered to have paid for the property in the first place. This also has the effect of increasing your taxable capital gain when the property is sold.
For example, if you paid $200,000 for a building and you’re allowed to claim $5,000 in depreciation, then you’ll be treated subsequently as if you had paid $195,000 for the building. If you then sell the real estate, the $5,000 is treated as recapturing those depreciation deductions. The tax rate that applies to the recaptured amount is 25%.
So if you sold the building for $210,000, there would be total capital gains of $15,000. But $5,000 of that figure would be treated as a recapture of the deduction from income. That recaptured amount is taxed as ordinary income but is capped at the maximum rate of 25%. The remaining $10,000 of capital gain would be taxed at one of the 0%, 15%, or 20% rates indicated above.
High-income earners may be subject to another tax on their capital gains: the net investment income tax. This tax imposes an additional 3.8% on your investment income, including your capital gains if your modified adjusted gross income (MAGI) exceeds certain maximums: $250,000 if married and filing jointly or you’re a surviving spouse, $200,000 if you’re single or a head of household, and $125,000 if married and filing separately.
Advantages of Long-Term Capital Gains
It can be advantageous to keep investments longer if they will be subject to capital gains tax once they’re realized.
The tax rate will be lower for most people if they realize a capital gain after one year. For example, suppose you bought 100 shares of XYZ Corp. stock at $20 per share and sold them at $50 per share. Your regular income from earnings is $100,000 a year, and you file taxes jointly with your spouse. The chart below compares the taxes that you would pay when you sold the stock after more than a year vs. after less than a year.
|How Patience Can Pay Off in Lower Taxes|
|Transactions and consequences||Long-term capital gain||Short-term capital gain|
|Bought 100 shares @ $20||$2,000||$2,000|
|Sold 100 shares @ $50||$5,000||$5,000|
|Capital gain||$450 (taxed @ 15%)||$660 (taxed @ 22%)|
|Profit after tax||$2,550||$2,340|
*This chart shows how a married couple (filing jointly) earning $100,000 a year could avoid more than $200 in taxes by waiting at least a year before selling shares that had appreciated $3,000.
You would pay $450 of your profits by opting for a long investment gain and being taxed at long-term capital gains rates. But had you held the stock for less than one year (and hence incurred a short-term capital gain), your profit would have been taxed at your ordinary income tax rate. For our $100,000-a-year couple, that would trigger a tax rate of 22%, the applicable rate for income over $81,051 in 2021. That adds an additional $210 to the capital gains tax bill, for a total of $660.
While it’s possible to make a higher return by cashing in your investments frequently and repeatedly shifting the funds to fresh new investment opportunities, that higher return may not compensate for higher short-term capital gains tax bills. Making constant changes in investment holdings, resulting in high payments of capital gains tax and commissions, is called churning.
Are Long-Term Capital Gains Rates Going up in 2022?
Capital gains are not going up in 2022 despite proposals to change legislation. In September 2021, the House Ways and Means Committee released its proposal of tax-raising provisions. The proposal included an increase from 20% to 25% for the top long-term capital gains rate. The proposal was written to be effective as of Sept. 13, 2021, which meant that transactions completed before that date would still be subject to the 20% rate, while transactions afterward would be subject to 25%.
How do I Calculate Capital Gain on the Sale of Property?
You must first determine your basis in the property. Your basis is your original purchase price plus any fees that you paid minus any depreciation taken. Next, determine your realized amount. Your realized amount is the price you're selling the property for minus any fees paid by you. Finally, you need to subtract your basis from your realized amount. If the figure is positive, then you will have a capital gain. If the figure is negative, then you will have a capital loss.
Will my Long-Term Capital Gains Push me Into a Higher Ordinary Income Tax Bracket?
Your long-term capital gains will not cause your ordinary income to be taxed at a higher rate. Ordinary income is calculated separately and taxed at ordinary income rates. More long-term capital gains may push your long-term capital gains into a higher tax bracket (0%, 15%, or 20%), but it will not affect your ordinary income tax bracket.
However, if you had short-term capital gains, then it would increase your ordinary income and potentially push you into the next marginal ordinary income tax bracket.
The Bottom Line
The tax on a long-term capital gain is almost always lower than if the same asset were sold in less than a year. Most taxpayers don’t have to pay the highest long-term rate. Tax policy encourages you to hold assets subject to capital gains for a year or more.
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