There are two capital gains tax categories – short term and long term.
Long term investments pay less in taxes – these are investments that you typically hold for longer than one year.
Short term investments are taxed at your regular income rate.
Let’s break down what the capital gains tax brackets look like, the income cut-offs, and more below. You can see how these compare to the regular Federal tax brackets here.
What Are Capital Gains?
When you sell a stock for a profit, you realize a capital gain. Basically, when most assets are sold for a profit, a capital gain is generated. Profits or gains are taxable. How much you’ll pay depends on a number of factors, including the current tax brackets, which change periodically.
Personal assets and investments are called capital assets. This includes your home, car, investments, recreational vehicle, and more. IRS Topic Number 409 covers these items in more detail. A capital gain or capital loss is based on the difference between the asset sale price and your adjusted basis, which is referenced in IRS Publication 551.
2019 Capital Gains Tax Brackets
There are two main categories for capital gains: short- and long-term. Short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains are taxed at only three rates: 0%, 15%, and 20%.
Short-Term Capital Gains Rates
Tax rates for short-term gains are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Short-term gains are for assets held for one year or less.
Short Term Capital Gains Tax Brackets
Long-Term Capital Gains Rates
Just like short-term gains, there are four filing categories: single, married and filing jointly, head of household, and married and filing separately. The amount of taxes paid is based on income.
Long-term gains are those on assets held for over a year. Below, the percentage of taxes paid are listed on the left with the corresponding income on the right.
Long Term Capital Gains Tax Brackets
Married filing separately is a unique case. Make sure you speak to an accountant around long term capital gains in this case. Here is the tax brackets for it though:
- 0% = $0 to $38,600
- 15% = $38,601 to $239,500
- 20% = $239,501 and up
Calculating Capital Gains and Losses
While you can have a capital gain from the profitable sale of an asset, you can also have a capital loss from the sale of an asset below your purchase price or adjusted basis.
As an example, say you buy and sell stock in the same year up to November. Your trading has netted $10,000 in profits. These profits are classified as short-term gains because they’re less than a year old. Then in December of the same year, you sell more stock for a loss of $3,000. Your capital gain is reduced to $7,000.
A different investor buys and sells some stock during a year and manages to lose $5,000. This investor has a capital loss of $5,000 but can only declare $3,000 ($1,500 if married filing separately) for the current year. What happens to the remaining $2,000?
The $2,000 capital loss in the previous example is carried over to the next year. It can be applied as a capital loss. Using another example, our investor has a capital gain of $10,000 in the next year. They can offset this gain and reduce their taxes by the amount carried over from the previous year: $2,000. Their new capital gain is then $8,000.
Just like ordinary income, capital gains are taxed progressively. You can see this in the tax brackets section above. If you are single and make $450,000, your long-term capital gains tax bracket is 20%. The good news is that the full $450,000 isn’t taxed at 20%. It instead is taxed at three different levels of income using different tax rates.
How to Reduce Your Taxes
Nobody likes paying taxes and everyone is looking for ways to reduce them. There are a few ways that you can reduce your capital gains taxes.
Selling Your Home
You can reduce gains on your home sale by up to $250,000 if you’re single and $500,000 if your married and filing jointly.
There are some rules to pay attention to. You must have lived in the home (primary residence) for two years during a five-year period before the house is sold. You can’t have sold another home and used it to reduce capital gains within a two-year period of selling your primary home.
Keeping Investments for at Least a Year
If you hold investments for at least a year before selling, you’ll be able to take advantage of long-term gains.
Use a Robo-Advisor
Robo-advisors have become very popular. While they haven’t yet replaced financial advisors, for most people, they can help save on taxes.
Robo-advisors use a method called tax-loss harvesting. By selling losers, gains on winners are offset. Of course, you can perform tax-loss harvesting manually. However, robo-advisors make this task easy through the use of automation.
It seems there is nowhere to hide from taxes. But arming yourself with knowledge about capital gains taxes can help you save money. We’ve already seen a few practical tips. Your accountant is likely to have more. Ask your accountant questions throughout the year so you can set yourself up for maximizing capital gains tax reductions.