So you’ve made some money investing. Congrats on the big score — or really any asset trade where you came out ahead.
But don’t count your profits too quickly, because Uncle Sam wants his cut of your gains, too. If you’ve made money on an investment, then you’ve earned a capital gain and you’ll have to pay tax on it.
And what you pay depends on how long you’ve held onto those assets. If you have a long-term capital gain – meaning you held the asset more than a year, you’ll owe either 0 percent, 15 percent or 20 percent, depending on how much overall income you have.
What is the capital gains tax rate?
Capital gains are divided into two big groups, short-term capital gains and long-term capital gains, depending on how long you’ve held the asset.
Here are the differences:
- Short-term capital gains tax is a tax applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are pegged to where your income places you in federal tax brackets, so you’ll pay them at the same rate you’d pay your ordinary taxes.
- Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
- Property sale tax: Real estate sales are a very specific form of capital gains, and are governed by their own set of rules.
What are the capital gains tax rates?
The capital gains tax rates remained the same as under the 2018 tax law, but the income required to each bracket goes up each year to account for workers’ increasing incomes. Here are the details on capital gains rates for the 2019 and 2020 tax years.
Long-term capital gains tax rates for the 2019 tax year
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $39,375||$39,376 – $434,550||Over $434,550|
|Married filing jointly||Up to $78,750||$78,751 – $488,850||Over $488,850|
|Married filing separately||Up to $39,375||$39,376 – $244,425||Over $244,425|
|Head of household||Up to $52,750||$52,751 – $461,700||Over $461,700|
Source: Internal Revenue Service (IRS)
Long-term capital gains tax rates for the 2020 tax year
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $40,000||$40,001 – $441,450||Over $441,450|
|Married filing jointly||Up to $80,000||$80,001 – $496,600||Over $496,600|
|Married filing separately||Up to $40,000||$40,001 – $248,300||Over $248,300|
|Head of household||Up to $53,600||$53,601 – $469,050||Over $469,050|
For example, in 2020, a single person won’t pay any capital gains tax if their total taxable income is $40,000 or below. However, they’ll pay 15 percent on capital gains if their income is $40,001 to $441,450. Above that income level, the rate jumps to 20 percent.
In addition, those capital gains may be subject to the net investment income tax (NIIT), an additional levy of 3.8 percent if the taxpayer’s income is above certain amounts. The income thresholds depend on the filer’s status (individual, married filing jointly, etc.).
Meanwhile, for short-term capital gains on assets you buy and sell within a year, the tax brackets for ordinary income taxes apply. The 2020 tax brackets are still 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
In other words, unlike the long-term capital gains tax rate, there is no zero-percent rate or 20-percent ceiling for short-term capital gains taxes.
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How capital gains taxes work
If you buy $5,000 worth of stock in May and sell it in December of the same year for $5,500, you’ve made short-term capital gains of $500. If you’re in the 22 percent tax bracket, you have to pay the IRS $110 of your $500 capital gains. That leaves you with $390.
Instead, if you hold on to it until the following December and then sell it, at which point it has earned $700, it’s a long-term capital gain. If your total income still puts you in the 22 percent bracket, then you’ll owe tax at just the 15 percent bracket for that capital gain. Instead of paying $110, you’ll pay $105, and see $595 worth of profit instead.
What counts as a capital gain?
If you sell an asset for more than you paid for it, that’s a capital gain. Much of what you own will experience depreciation over time, so the sale of most possessions will never be considered capital gains. But these rules still apply to anything you purchase and resell for a gain.
For example, if you sell artwork, a vintage car, a boat, or jewelry for more than you paid for it, that’s considered a capital gain.
Property such as real estate and collectibles, including art and antiques, fall under special capital gains rules. These gains specify different and sometimes higher tax rates.
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What is the capital gains tax on property sales?
Again, if you make a profit on the sale of any asset, it’s considered a capital gain. With real estate, however, there are different rules for avoiding a capital gains tax hit.
For profits on your main home to be considered long-term capital gains, the IRS says you have to own the home AND live in it for two of the five years leading up to the sale. You can exempt up to $250,000 in profits from capital gains taxes if you sold the house as an individual, or up to $500,000 in profits if you sold it as a married couple filing jointly.
If you’re just flipping a home for a profit, however, you could be subjected to a steep short-term capital gains tax if you buy and sell a house within a year or less.
25 percent capital gains rate for certain real estate
A 25 percent rate applies to the part of the gain from selling real estate you depreciated, typically when you’ve rented the house to someone. Basically this rule keeps you from getting a double tax break. The IRS first wants to recapture some of the tax breaks you’ve been getting via depreciation throughout the years on assets known as Section 1250 property.
You’ll have to complete the worksheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, or your tax software will do the figuring for you. More details on this type of holding and its taxation are available in IRS Publication 544.
If you’re considering a real estate investment, you can compare mortgage rates on Bankrate.
28 percent capital gains rate
Two categories of capital gains are subject to the 28 percent rate: small-business stock and collectibles.
If you realized a gain from qualified small-business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. You can get the specifics on gains on qualified small-business stock in IRS Publication 550.
If your gains came from collectibles rather than a business sale, you’ll also pay the 28 percent rate. This includes proceeds from the sale of:
- A work of art
- Precious metals
- Wine or brandy collections
What if I lose money on investments?
If you have capital losses from investments, you’ll certainly want to claim them on your taxes, because you’ll be able to use them to offset any other capital gains that you have.
Both long-term capital gains taxes and short-term capital gains taxes count toward your net investment income. The IRS looks at the total of your gain when calculating tax, which means your losses can offset some of the gains and soften the hit a bit. So you or your financial planner can strategically balance out your winners with some losers to minimize your taxes.
If you have more losses than gains, you can even claim a net loss – up to $3,000 as an individual or married filing jointly – and reduce your overall tax burden. Many taxpayers make sure that they’re taking any loss they’re entitled to, in order to minimize their tax burden. It’s a practice called tax-loss harvesting, and it can save you money come April 15.