Capital gains are profits derived from the sale of capital assets, such as stocks, bonds, and real estate. When you sell a capital asset for more than you paid for it, the difference is subject to capital gains tax. The tax rate you pay depends on the length of time you held the asset before selling it.
Key Facts
- Classification of capital gains: Capital gains are classified as either short-term or long-term. If you hold an asset for more than one year before selling it, the capital gain is considered long-term. If you hold it for one year or less, the capital gain is considered short-term.
- Tax rates for long-term capital gains: The tax rates for long-term capital gains vary depending on your overall taxable income. For taxable years beginning in 2023, the tax rate on most net capital gains is no higher than 15% for most individuals. However, a capital gains rate of 0% applies if your taxable income is below certain thresholds. A capital gains rate of 20% applies if your taxable income exceeds the thresholds set for the 15% capital gain rate.
- Exceptions to the tax rates: There are a few exceptions where capital gains may be taxed at rates greater than 20%. These include the taxable part of a gain from selling section 1202 qualified small business stock, net capital gains from selling collectibles, and the portion of any unrecaptured section 1250 gain from selling section 1250 real property.
Classification of Capital Gains
Capital gains are classified as either short-term or long-term. This classification is based on the holding period of the asset. If you hold an asset for more than one year before selling it, the capital gain is considered long-term. If you hold it for one year or less, the capital gain is considered short-term.
Tax Rates for Long-Term Capital Gains
The tax rates for long-term capital gains vary depending on your overall taxable income. For taxable years beginning in 2023, the tax rate on most net capital gains is no higher than 15% for most individuals (https://www.irs.gov/taxtopics/tc409). However, a capital gains rate of 0% applies if your taxable income is below certain thresholds (https://www.bankrate.com/investing/long-term-capital-gains-tax/). A capital gains rate of 20% applies if your taxable income exceeds the thresholds set for the 15% capital gain rate (https://www.fidelity.com/learning-center/smart-money/capital-gains-tax-rates).
Exceptions to the Tax Rates
There are a few exceptions where capital gains may be taxed at rates greater than 20%. These include:
- The taxable part of a gain from selling section 1202 qualified small business stock (https://www.irs.gov/pub/irs-pdf/p550.pdf)
- Net capital gains from selling collectibles (https://www.irs.gov/pub/irs-pdf/p544.pdf)
- The portion of any unrecaptured section 1250 gain from selling section 1250 real property (https://www.irs.gov/pub/irs-pdf/p544.pdf)
Conclusion
Capital gains tax rates can have a significant impact on your investment returns. It is important to understand the different tax rates that apply to short-term and long-term capital gains, as well as the exceptions to the general tax rates. By carefully planning your investments and taking advantage of tax-advantaged accounts, you can minimize your capital gains tax liability.
Sources
- Topic no. 409, Capital gains and losses
- 2023-2024 Long-Term Capital Gains Tax Rates
- Capital gains tax: Definition, rates, and ways to save
FAQs
What is the long-term capital gains tax rate?
The long-term capital gains tax rate is the tax rate that applies to profits from the sale of capital assets that have been held for more than one year. The long-term capital gains tax rate is lower than the short-term capital gains tax rate.
What are the long-term capital gains tax rates for 2023?
The long-term capital gains tax rates for 2023 are as follows:
- 0% for taxable income up to $44,625 for single filers and $89,250 for married couples filing jointly
- 15% for taxable income between $44,626 and $492,300 for single filers and $89,251 and $553,850 for married couples filing jointly
- 20% for taxable income over $492,300 for single filers and $553,850 for married couples filing jointly
How can I reduce my long-term capital gains tax liability?
There are a few ways to reduce your long-term capital gains tax liability, including:
- Holding your investments for more than one year before selling them
- Investing in tax-advantaged accounts, such as 401(k)s and IRAs
- Harvesting your capital losses
What is the difference between short-term and long-term capital gains?
Short-term capital gains are profits from the sale of capital assets that have been held for one year or less. Short-term capital gains are taxed at the same rate as your ordinary income. Long-term capital gains are profits from the sale of capital assets that have been held for more than one year. Long-term capital gains are taxed at a lower rate than short-term capital gains.
What are some examples of capital assets?
Examples of capital assets include stocks, bonds, real estate, and collectibles.
What is the wash sale rule?
The wash sale rule is a tax rule that prevents you from claiming a capital loss on the sale of a security if you buy a substantially identical security within 30 days before or after the sale.
What is the net investment income tax?
The net investment income tax is a 3.8% tax on investment income, including capital gains, for high-income taxpayers.