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The capital gains tax rate that applies to gains from the sale of stocks, mutual funds or other capital assets held for more than one year (ie long-term capital gains) is either 0%, 15% or 20% . However, to which of those long-term capital gains rate applies
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But what if you hold the asset for a year or less (ie, a short-term capital gain)? In that case, you’re looking at a completely different set of tax rates applicable to the gain. Plus, the type of property sold can also have an impact on the capital gains tax rate. And did you know that some people have to pay an additional surcharge on top of capital gains tax? All of this can be very confusing.
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So don’t run out and spend all your winnings right away if you’re lucky enough to score big on a hot stock tip. Instead, first take some time to figure out how much you need to save for tax time (or for an anticipated tax payment). As described in detail below, there are various factors that affect the determination of the rate of capital gains tax that applies and whether excess tax is due. Do yourself a favor and study the rules before making plans to spend any capital gains you reap.
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To encourage long-term investment, lower tax rates apply to capital gains from the sale of assets held for more than one year (again, either 0%, 15% or 20%). If your income is low enough, you may even qualify for the 0% rate. On the other hand, wealthier taxpayers are likely to pay tax on long-term capital gains at the rate of 20% – but this will still be less than the tax rate they would pay on other income such as wages or on short term capital gains.
So where do you stand when it comes to the tax rate on long-term capital gains? It all depends on your taxable income. Here are the long-term capital gains taxable income thresholds for the 2022 tax year:
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Income thresholds for long-term capital gains tax rates are adjusted annually for inflation. The IRS has already released the 2023 thresholds, so you can start planning for 2023 capital asset sales now. Due to the high inflation we have seen recently, the adjustments from 2022 to 2023 were larger than usual. However, this is actually a good thing for taxpayers – especially people with stagnant incomes or incomes that grow more slowly than the rate of inflation. Without an adjustment to adjust for rising inflation, more people would end up paying a higher rate in 2023 than for 2022.
For example, if you are single with taxable income of $40,000 in 2022, you qualify for the 0% long-term capital gains rate for that tax year. If your income grew by 5% ($2,000) in 2023, your taxable income of $42,000 for 2023 would bump you up to the long-term capital gains tax rate of 15%, if not for the adjustment inflation. However, since the 0% rate applies to people with taxable income up to $44,625 in 2023, you will qualify for that rate for the 2023 tax year.
To see how all taxable income thresholds changed from 2022 to 2023, here are the figures for the 2023 tax year that you can compare to the 2022 amounts above:
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The tax rate on short-term capital gains (that is, from the sale of assets held for a year or less) is the same as the rate you pay on wages and other “ordinary” income. These rates currently range from 10% to 37%, depending on your taxable income. The income thresholds for each tax rate are also adjusted annually for inflation. For the ordinary tax rate that applies to you, see What are the income tax brackets for 2022 vs 2023?
Generally, the rate you’ll pay on long-term capital gains is less than the rate you’ll pay on short-term gains. So, in most cases, you can save on taxes by holding capital assets like stocks, bonds and real estate for more than a year before selling.
There are some exceptions to the general capital gains tax rates. Perhaps the most common exception involves gains from the sale of collectibles that qualify as capital assets. For this special rule, a “collection” may be a work of art, antique, stamp, coin, bottle of wine or other alcoholic beverage, gold or other precious metal, precious stone, historical object, or other similar item. If you sell an interest in a partnership, S corporation, or trust, any gain from that sale attributable to unrealized appreciation in the value of collectibles is also treated as gain from the sale of collectibles.
Instead of a top tax rate of 20%, long-term gains from the sale of collectibles can be hit with a capital gains tax of up to 28%. If your ordinary rate of tax is lower than 28%, then this rate will apply. But if you are in a higher tax bracket (ie 32%, 35% or 37%), then the capital gains tax on your accumulated earnings is capped at 28%.
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The 28% limit does not apply to short-term capital gains. So if you don’t own a collection for at least a year before selling it, you’ll be taxed on any gain at your ordinary tax rate (between 10% and 37%).
If you sell “qualified small business stock” (QSBS) that you’ve held for at least five years, some or all of your gain may be tax-free. However, a maximum capital gains tax rate of 28% applies to any gain that is not tax-exempt.
As with the 28% rate for bundled items, if your ordinary tax rate is below 28%, then this rate will apply to QSBS taxable profit. The 28% rate also does not apply to short-term capital gains from the sale of QSBS.
If you sell real estate for which you previously claimed a depreciation deduction, you may have to pay a capital gains tax of up to 25% on any unrecovered depreciation. The taxable amount is known as “recaptured Section 1250 gain” (named after the section of the tax code that covers gain from the sale or other disposition of certain depreciable real property). The rest of your long-term gain is taxed at either 0%, 15% or 20%. For most people, this is only done if you are selling a rental property.
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Once again, the 25% rate is a maximum rate. So if your ordinary rate of income tax is lower, you won’t have to pay as much. Instead, your ordinary tax rate will apply. Also, the rate does not apply to short-term profits.
There is an additional 3.8% surcharge on net investment income (NII) that you may have to pay on top of capital gains tax. (NII includes, among other things, taxable interest, dividends, profits, passive rents, annuities, and royalties.)
You must pay the surcharge if you are a single or head-of-household taxpayer with modified gross income (AGI) over $200,000, a married couple filing a joint return with modified AGI over $250,000, or a married person filing a separate returns with modified AGI over $125,000. Use Form 8960 to calculate the withholding tax.
Rocky Mengle was a Senior Tax Editor from October 2018 to January 2023 with more than 20 years of experience covering federal and state tax developments. Before coming to , Rocky worked for Wolters Kluwer Tax & Accounting, and Kleinrock Publishing, where he provided breaking news and guidance to CPAs, tax attorneys and other tax professionals. He is also quoted as an expert by
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, and other media. Rocky holds a law degree from the University of Connecticut and a B.A. in History from Salisbury University. The Capital Gains Tax Calculator is a quick way to calculate gains from the transfer or sale of a capital asset for tax year 2022 (filing in 2023) and tax year 2021. This capital gains tax calculator will calculate the gains from any type of asset you sold or transferred during the 2022 tax year or the 2021 tax year.
As you know, anything you own as a personal or investment—such as your home, land or household furnishings, stocks, shares, or bonds—will fall under the term “capital assets.” The IRS will charge you capital gains tax if you sell or transfer or exchange said capital asset. To learn more about capital gains, please refer to IRS Publication 544,
Capital gains tax rates are based on the types of capital assets which are determined based on the holding period of a capital asset. There are two types of capital gains = short term capital gains and long term capital gains
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