In the United States, the Capital Gains Tax is a tax imposed on the profits made when an asset is sold. The most common capital gains are those from selling property, stocks, bonds, and precious metals.
Long-term capital gains tax
Long-term capital gains are realized when investors sell a capital asset they have owned for more than a year. A long-term capital gain is generally taxed at lower rates than short-term gains. It’s essential to keep in mind that the tax rate will depend on the assets you hold and your taxable income. You can offset your capital gains by claiming losses, and you may carry over your net capital loss to your next tax year.
If you make a profit on the sale of an asset, you must report it on your return. For example, if you sell a car, you must write the amount you made. Likewise, if you own a house, you’ll need to report the profit you made on the home sale.
There are many reasons why you may decide to sell an asset before you’re ready. These reasons include selling a home to move out of a crowded area or buying a new home. However, if you’re considering selling a personal residence, you should know that you’ll pay a capital gains tax on the profits you earn from it. While there are some exceptions, such as selling a home that was your primary residence for at least two years, most of these are subject to the same tax.
The IRS defines long-term capital gains as profits on selling a capital asset held for more than a year. When calculating your capital gains, you subtract the investment’s cost from the sale’s proceeds. This is called the cost basis. Once you have accounted for any extenuating circumstances, you can use the standard federal income tax rate to determine your tax rate. Most taxpayers will qualify for a 15% or 20% long-term capital gains tax rate.
The maximum long-term capital gains rate applies to those with a taxable income of $44,626 or higher in 2024. In addition, nine states offer unique tax benefits for long-term capital gains. Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are among them.
If you earn less than $44,625 in 2024, you will not have to pay any capital gains tax. Singles who file jointly will also not have to pay any capital gains tax on the profits they earn on selling a capital asset.
However, if you’re single and earn more than $44,625 in 2024, the tax on your capital gains will increase to 20 percent. Tax brackets are not fixed, so the rate you pay can be higher than expected. Also, your tax bracket is adjusted for inflation each year. As a result, you’ll want to be aware of your tax bracket and keep track of the inflation threshold.
Short-term capital gains tax
Depending on your income level and type of asset, the capital gains tax rate you pay will vary. A high-income investor may have to pay an additional surtax on top of the regular capital gains tax rate. Generally, a low-income individual will qualify for a 0% rate. This can help reduce the tax liability on investment earnings.
The short-term capital gains tax rate applies to assets sold within one year of acquisition. Unlike the long-term capital gains rate, there is no maximum amount. However, it is essential to note that short-term capital gains are usually taxed at the same rates as ordinary income. These rates follow the same income brackets as the expected income tax rate, and the upper limits for each bracket are adjusted annually.
Long-term capital gains are profits from assets held for more than a year. To determine the proper tax rate, you will need to calculate the net capital gain of the transaction. This is the difference between the purchase price and the sale price of the asset. Typically, you will need to subtract any commissions paid during the purchase.
To calculate the appropriate capital gains tax rate, you will need to know your type of asset, the number of net gains or losses you have generated, and the tax bracket you are in. Using the example below, let’s assume you bought shares of a fictional company, Alma’s Almanacks, about a year ago. Now you decide to sell your shares. You have a $1,000 net capital gain. Because your income is below $44,625 in 2024, you won’t have to pay the capital gains tax on this amount.
Similarly, if you own a home you have lived in for more than two years, you will not have to pay the short-term capital gains tax on any of your profits. In addition, you can also deduct $5000 of the gain from your sale. However, the benefit you receive from being able to claim this tax deduction will be reduced if you have any other taxable income.
For most people, the short-term capital gains tax rate is a fairly straightforward calculation. It follows the same logic as the ordinary income tax rate and is a great way to reduce your tax burden when you sell your investment. Compared to the long-term capital gains tax, which varies depending on your taxable income, the short-term capital gains tax rate can be surprisingly low.
Fortunately, there are many ways to reduce the capital gains taxes you must pay. One of the most effective is to hold your investments for longer than one year. By doing this, you can avoid paying the capital gains tax on any profits you generate, but you can still benefit from any earnings you may have when you cash them in.
Economic analyses of capital gains taxation
The taxation of capital gains is an ongoing debate that has persisted for over 70 years. In the 1970s, congressional lawmakers proposed reductions in the rate, which were enacted. This prompted a host of technical and political problems. Some studies suggested that such taxation could create a negative wealth effect. Others found that the decrease in tax rates was regressive.
Several studies have examined the economic effects of lowering or eliminating the capital gains tax. Studies have been done using a variety of methodologies and assumptions, and the findings have ranged from highly speculative to empirically confirmed. However, one theory is that reducing capital gains taxes increases overall savings and investment. Because of this, a lower rate reduces the cost of capital for firms. It also increases after-tax income, which would lead to a bigger economy.
While the effects of a lower tax rate on the average taxpayer are modest, there is a significant effect on those in the top 1 percent. After-tax income would rise by 0.21 percent, compared to a 0.04 percent increase for the bottom four quintiles. A study by the Joint Committee on Taxation suggests that taxing realizations at a low rate may induce individuals to delay their realizations.
Another study by Auten and Clotfelter suggests that reducing the tax rate would generate more significant revenues in the short run but less in the long run. Their model also estimated that a tax reduction in the capital gains tax would have a -0.7 percent effect on realizations. At the same time, a -1.0 impact was found with the same tax reduction in the ordinary income tax. Despite the differences, all three analyses agree that reducing the capital gains tax would increase after-tax income and boost wages.
Indexing the cost or basis of an asset has been proposed as a way to compensate for inflation. The Tax Foundation estimates that indexing would increase the long-run size of the economy by 0.11 percent. They also estimate that indexing would produce a small increase in labor productivity and a slight reduction in federal revenue, positively affecting wages.
There are also some other potential benefits to indexing capital gains. Such an index would help to improve the incentive for investment in the United States. In addition, it would allow taxpayers to deduct losses. As a result, the tax system could be simplified.
Finally, indexing capital gains to inflation would boost the long-run output of the economy. A study by the Tax Foundation shows that indexing capital gains to inflation would increase after-tax GDP by 0.11 percent, compared to a 0.08 increase with no indexing. Additionally, the increase would boost after-tax wages by 0.08 percent. Combined with the other economic benefits of indexing, the additional economic growth could offset some of the financial costs of a decrease in the tax rate on capital gains.
It’s important to differentiate between long-term and short-term capital gains, although simple. If the stock or any other non-inventory asset is held for more than a year before its sold, it is long-term capital gains. If held for less than a year, it’s short-term capital gains and is taxed as ordinary income.
As the highest tax rate that applies to you on federal income taxes is probably higher than the capital gains tax rate, many investors recommend not selling stocks before holding them for less than a year.
Realizing the capital gains
Note that for you to pay taxes on the profit generated from the sale of the stock, they must be realized – meaning that you must sell the stock. Until you pay the stocks, you aren’t going to pay taxes regardless of how much the stock’s price increases.
Unrealized capital gains
From the moment you purchase the stock to the point you sell it, they are unrealized. The same as realized gains or losses, you can have unrealized capital gains or losses. The taxes go into effect only when you sell the stock, realizing it.
Capital gains tax tables 2024
| Tax Rate | Married Filing Jointly/Qualifying Widow(er) | Married Filing Separately | Single | Head of Household |
| 0 percent | $0 – $80,800 | $0 – $40,400 | $0 – $40,400 | $0 – $54,100 |
| 15 percent | $80,801 – $501,600 | $40,401 – $250,800 | $40,401 – $473,750 | $54,101 – $473,750 |
| 20 percent | $501,601 or more | $250,801 or more | $473,751 or more | $473,751 or more |
As the capital gains tax rates make it clear, you might just pay no taxes on capital gains at all if your income mainly comes from the sale of the earlier investments you’ve made. The above income amounts refer to your taxable income, not AGI or MAGI and this makes it even better.