Capital Gains & Your Taxes: A Brief (But Important!) Guide
Melissa Osika, MBA
Classic investments, like stocks, are not the only investments taxed by capital gains. Capital gains taxes can apply to any other property that acquires value over time. These taxes are calculated by subtracting the cost of the investment from the final selling price of said investment. This final amount is reported as capital gains. But, the final amount can be taxed at different rates depending on the investment type and total monetary gain.
Below we’re reviewing how capital gains taxes are determined and what methods you can use to reduce them.
Capital Gains Tax Rates
The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $80,000.1
A capital gain rate of 15% applies if your taxable income is $80,000 or more but less than $441,450 for single; $496,600 for married filing jointly or qualifying widow(er); $469,050 for head of household, or $248,300 for married filing separately.1
However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.1
There are a few other exceptions where capital gains may be taxed at rates greater than 20%:.1
- The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
- Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
- The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.1
Make sure to check with your tax professional to understand how different investments are taxed.
Duration of the Investment
The amount of time you hold an investment can reduce the amount of taxes you ultimately pay. The IRS has established two investment types: short-term and long-term.1 Investment duration is calculated from the day of purchase to the day of sale - over a year is considered long-term, while short-term is under a year.1
What Isn’t Affected by Capital Gains?
Certain types of property and accounts are not affected by capital gains taxes. If applicable, see if you can utilize these property and account types to maximize your investment.
There are two general property types unaffected by capital gains. The first is business property, including products. The second is anything you create as an individual. This could be a book you wrote or an invention you patent.
Alternatively, specific retirement and education accounts can help protect your investment from capital gains taxes, such as a Roth IRA.
Offsetting Capital Gains
Investments may not always pay off. Sometimes a market change results in your property reducing in value. This reduction is also calculated on your taxes and is calculated into your capital gains taxes. This can lower your taxable income range.
For example, if you receive $90,000 from selling one investment, you would be taxed in the 15 percent range. However, if you lost $15,000 on another investment, this would drop your total income from investments to $75,000, which could place you beneath the 15 percent tax range. These reductions and gains can only be combined if they are the same type of investment, long-term or short-term and are sold in the same year.1
Capital gains taxes can be postponed by using the income to invest in a similar property type.2 However, make sure to consult the IRS website or your tax professional before moving forward on any like-kind exchange, as the requirements and investment types have changed over the years.
Make sure you prepare to protect your investments from higher tax rates. And when selling an investment, or even a piece of property, make sure to talk with us or your tax professional to help determine how much you could be taxed.
This content is developed from sources believed to be providing accurate information.. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Information contained may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.