A capital gain is 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 are from an asset you’ve held for more than one year, and short-term capital gains apply to profits from selling an asset you’ve held for less than a year.
Long-Term Capital Gains Tax
Long-term capital gains are taxed at lower rates than ordinary income, and how much you owe depends on your annual taxable income. You’ll owe either 0%, 15% or 20% on gains from the sale of most assets or investments held for more than one year, depending on your annual taxable income (for more on how to calculate your long-term capital gains tax, see below).
When calculating the holding period—or the amount of time you held 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, 2019, your holding period started on February 2, 2019, and you would’ve hit the one-year mark of ownership on February 1, 2020.
What Are the Long-Term Capital Gains Tax Rates for 2020?
What Are Long-Term Capital Gains Tax Rates for 2021?
Short-Term Capital Gains Tax
If you’ve held an asset or investment for one year or less before you sell it for a gain, 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.
Federal Income Tax Brackets for 2020
Federal Income Tax Brackets for 2021
What Is a Capital Gain?
A capital 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, but once you’ve sold an asset for a gain, you’re required to claim it on your income taxes. Capital gains are not adjusted for inflation.
Here’s how capital 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 capital 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. If you sell an RV or your grandmother’s silver tableware for a loss, you can’t use the loss to offset capital gains. 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 capital 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 capital gains. You also may use capital 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 capital gains taxes using IRS forms. To calculate and report sales that resulted in capital 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 capital 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 capital gains, different rules apply. These include capital gains from the sale of collectibles (like art, antiques and precious metals) and owner-occupied real estate.
Capital Gains Taxes on Owner-Occupied Real Estate
If you sell your home for a profit, that’s considered a capital 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 capital 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 capital 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 capital gains from the sale of shares in any pass-through investing vehicle that invests in precious metals (such as an exchange traded fund 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 capital 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.
