Different types of income are taxed at different rates by the US government. Some forms of capital gains, such as earnings from the sale of long-held stock, are taxed at a lower rate than wage or interest income. On the other hand, capital gains are not handled the same way. The tax rate on short-term and long-term gains can differ dramatically. Understanding the capital gains tax rate is critical to achieving a significant profit for most investors.
What is capital gain?
The profit you make from selling an asset is called “capital gains.” These include investment securities such as stocks and bonds and vehicles, businesses, land, and boats. If you sell one of these assets, a taxable event occurs. This often requires that your income taxes report the capital gain or loss on that item to the IRS.
What’s the difference between a short-term and long-term capital gain or loss?
In general, capital gains and losses are handled based on the length of time you’ve owned a particular asset, referred to as the holding period. Long-term capital gains are from assets held for more than a year. On the other hand, short-term capital gains are profits earned by selling assets held for less than a year. Short-term and long-term capital gains are often subject to different laws and tax rates. You will generally pay less in taxes on long-term capital gains than you will on short-term capital gains. Similarly, capital losses are usually classified as short-term or long-term based on the same criteria.
What is the 2022 short-term capital gains tax rate?
Short-term capital gains are usually not subject to a particular tax rate and are instead often taxed at the same rate as your regular earnings. The rate you pay is determined by your income and filing status. Other things to consider when it comes to short-term capital gains:
- The holding period begins the day you purchase the asset and ends the day you sell it.
- Ordinary tax rates will range from 10% to 37% for 2021, depending on your income and filing status.
2021 Short-Term Capital Gains Tax Rates
| Rate | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Filing Status | Taxable Income | ||||||
| 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 | $209,425 to $523,600 | Over $526,601 |
| 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 $628,301 |
| 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 $314,151 |
What is the 2021 long-term capital gains tax rate?
According to the IRS, you may be eligible for a lower profit tax rate on the condition you hold your assets for more than a year. This differs by income as low-income taxpayers might pay nothing for their capital gains rate, while high-income taxpayers could save up to 17% on their regular income rate.
2021 Long-Term Capital Gains Tax Rates
| Tax Rate | 0% | 15% | 20% |
| Filing Status | Taxable Income | ||
| Single | Up to $40,400 | $40,401 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 |
What are the exceptions to the capital gains tax rate for long-term gains?
A notable exception stems from the Net Investment Income Tax (NIIT), which imposes a 3.8% surtax on certain net investments above a certain threshold. These typically apply to individuals, estates, and trusts. Those with high earnings who have considerable capital gains from investments, interest, and dividend income are usually subject to this surtax.
Additionally, collectible assets, such as antiques, fine art, coins, and even expensive vintages of wine, are one of the few exceptions to the reduced long-term capital gains rate. Regardless of how long you have owned the item, profits from the sale of these items are taxed at a rate of 28%.
What is the capital gains rate for retirement accounts?
One of the numerous advantages of IRAs and other retirement accounts is the ability to delay capital gains taxes. Whether you make a short-term or long-term gain in your IRA, you won’t have to pay any taxes until you withdraw funds. The downside is that any contributions and earnings you take from a taxable IRA or other taxable retirement accounts are taxed as ordinary income, including profits from long-term capital gains. Therefore, retirement accounts do not have access to reduced long-term capital gains rates even if they can defer taxes.
How can capital losses affect your taxes?
Short-term and long-term profits are taxed at various rates. However, if your investments lose money instead of turning a profit, such losses may have an impact on your taxes. In this situation, you can deduct those losses from your taxes. The IRS allows you to calculate your net capital gain or loss by combining your profits and losses for any given year.
- If you have a net loss after fully decreasing your profits with your losses, you can utilize up to $3,000 of it every year to lower your other taxable income.
- Your excess losses can be carried forward to offset capital gains and up to $3,000 in ordinary income in the coming years.
- You can’t utilize losses in IRAs or 401(k) plans to offset profits or other income since capital gains or losses are not generated in a retirement account.
How can you minimize capital gains taxes?
There are various strategies to reduce your capital gains taxes:
- Selling assets should be postponed. If you can hold on to an asset for more than a year before selling it, you may get a reduced capital gains rate on your earnings.
- Invest in accounts that are tax-free or tax-deferred. You can save a lot of money on taxes by investing in 401(k) plans, Roth IRA accounts, and 529 college savings programs. This is because these assets can grow tax-free or tax-deferred, which means you won’t have to pay capital gains taxes on any returns right away — and in some instances, you won’t have to pay any tax at all when you withdraw the funds.
- Don’t rush into selling your home. Your primary home is one of the key exceptions to the capital gains tax rate on real estate income. You may generally exclude up to $250,000 in capital gains on this sort of real estate if you’re single, and up to $500,000 if you’re married and filing jointly, provided you’ve owned and used it as your primary residence for at least two of the five years before to selling it. It’s also worth noting that you can’t usually avoid paying capital gains taxes on numerous property sales within two years.
If these seem a bit confusing, let Robert Hall & Associates assist you with your short and long-term capital gains taxes. Our premier tax firm can remove the burden of calculating and filing capital gains tax by providing you with stress-free tax preparation services. Our tax advisors are highly experienced at helping you minimize your capital gains tax. Call us at 818.583.8524 or fill out our contact us form to schedule a free consultation and let us help you save your hard-earned income.
