A capital gains tax is a tax levied on the profit — a “gain” — of the sale of an investment. For example, let’s say you realize a $20,000 gain on a stock sold. You’ll owe capital gains tax on that profit for the tax year it was sold. The exact capital gains tax rate you pay will depend on your income bracket.
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Which investments do capital gains taxes apply to?
Capital gains tax applies to more than just stock and bond sales. Other investments subject to capital gains tax include assets like:
- Coin collections
- Fine art
- Real estate
What are capital gains tax rates for 2022?
Capital gains tax rates are adjusted each year, with the rate dependent on the filer’s income.
2022 Capital Gains Tax Rates:
|Filing Status||Tax Rate: 0%||Tax Rate: 15%||Tax Rate: 20%|
|Single||Up to $41,675||$41,675 – $459,750||More than $459,750|
|Head of Household||Up to $55,800||$55,800 – $488,500||More than $488,500|
|Married, filing jointly and surviving spouses||Up to $83,350||$83,350 – $517,200||More than $517,200|
|Married, filing separately||Up to $41,675||$41,675 – $258,600||More than $258,600|
The IRS lists out exceptions to the above tax rate:
- “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.”
Additionally, certain types of capital assets may also be subject to ordinary income rates even if they qualify as long-term.
While these are the federal capital gains tax rates, keep in mind most states also levy a capital gains tax at the state level. However, the states that do not have a state income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not assess an additional tax on capital gains.
What is a short-term capital gains tax?
Investments owned for at least one year are subject to the traditional capital gains tax rates listed in the table above. However, if you sell an investment that you’ve owned for less than a year, you’ll face a short-term capital gains tax.
Short-term capital gains are taxed at the same rate as your ordinary income, which can be anywhere from 10% to 37% — typically, a much higher tax rate than the rate for long-term capital gains. You can find the 2022 income tax rates here.
What about the capital gains tax exemption on your home sale?
Depending on your tax filing status, the IRS may allow for a capital gains tax exemption on home sales. If you’re single, you can exclude up to $250,000 of profit on the sale of your home. If you’re married, you can exclude up to $500,000 profit.
This exclusion only applies to your principal residence — not vacation homes or investment properties. You can take this exclusion only once during a two year period.
There are additional IRS requirements to qualify you for this exclusion.
How do you calculate your capital gains tax?
Generally, calculating your capital gains tax is a simple process. Subtract your cost basis (what you paid for the asset plus any fees or commissions) from the price you sold the asset to reveal your gain or loss. If you realize a gain, refer to the table above to determine your capital gains tax rate.
However, if you have a high income, you may face a net investment income tax — a 3.8% tax on your capital gains. This is in addition to the capital gains tax levied against your gain.
The net investment income tax applies to those whose modified adjusted gross income is above the following thresholds:
- $200,000 for those filing as head of household or single
- $250,000 for those filing as married
- $125,000 for those married but filing separately
What about capital losses?
Capital losses realized on assets held for investment purposes, like stocks, can generally be used to offset capital gains for the year, thus reducing your tax obligation. Additionally, if you face an overall net loss for the year, up to $3,000 of that loss can apply as a deduction to other types of income, including salary.
However, capital losses from the sale of certain personal-use items, like your home or car, are not tax deductible.
Uncover money-saving tax strategies you may be missing.
When it comes to calculating your capital gains tax, work with our tax advisors at Landmark to maximize your investments while uncovering money-saving tax strategies.