|2022 long-term capital gains tax rate|
|single||Up to $41,675||$41,675 to $459,750||over $459,750|
|head of household||Up to $55,800||$55,800 to $488,500||over $488,500|
|Married joint filing and surviving spouse||Up to $83,350||$83,350 to $517,200||over $517,200|
|Married filing separately||Up to $41,675||$41,675 to $258,600||over $258,600|
As shown in this table, long-term capital gains are taxed in line with the tendency for capital gains to be taxed at a lower rate than personal income.
Special Capital Gains Rates and Exceptions
Certain classes of assets receive capital gains tax treatment that differs from the norm.
Gains from collectibles (including art, antiques, jewellery, precious metals and stamp collectibles) are taxed at a rate of 28% regardless of your income. Even if your tax rate is lower than 28%, you will be charged this higher rate. If you are in a higher tax bracket, your capital gains tax will be limited to 28%.
own real estate
Different criteria for real estate capital gains apply if you are selling your primary residence. Here’s how it works: A $250,000 capital gain on the sale of a home by an individual is not included in taxable income ($500,000 for a married filing jointly).
This applies as long as the seller owns and has lived in the home for two years or more.
However, unlike some other investments, capital losses on the sale of personal property, such as a home, cannot be deducted from the gains.
Here’s how it works. A taxpayer who bought a house for $200,000 and later sold his house for $500,000 made a profit of $300,000 on the sale. After applying for the $250,000 exemption, the person must report a capital gain of $50,000, which is the amount due to capital gains tax.
In most cases, the cost of major repairs and improvements to a home can be added to its cost, reducing the amount of taxable capital gains.
Invest in real estate
Investors who own real estate are often allowed to take a depreciation deduction on income to reflect the property’s deteriorating properties with age. (This is a decline in the physical condition of the home, not related to changes in the real estate market value.)
Depreciation deductions basically reduce the amount you originally paid for the property. This in turn can increase your taxable capital gains if you sell the property. That’s because the gap between the property’s value after deductions and its sale price will be wider.
Depreciation Deduction Example
For example, if you paid $100,000 for a building and you can claim depreciation of $5,000, you will be taxed as if you paid $95,000 for the building. Then consider the $5,000 to regain those depreciation deductions when you sell the real estate.
The tax rate applicable to the recovered amount is 25%. Therefore, if the person subsequently sells the building for $110,000, the total capital gain is $15,000. The $5,000 sales figure will then be considered a re-acquisition deducted from revenue. The amount recovered is taxed at a rate of 25%. The remaining $10,000 in capital gains will be taxed at 0%, 15% or 20%, depending on the investor’s income.
If you have a high income, you may be subject to another tax, which is net investment income tax.
This tax imposes an additional 3.8% tax on your investment income (including your capital gains) if your modified adjusted gross income or MAGI (not your taxable income) exceeds certain maximums.
These threshold amounts are $250,000 if you are married and filing jointly, or a surviving spouse; $200,000 if you are single or head of household, or $125,000 if you are married, filed separately.
Calculate your capital gains
Capital losses can be deducted from capital gains to calculate your taxable gain for the year.
Calculations get more complicated if you generate capital gains and capital losses on both short- and long-term investments.
First, separate short-term gains and losses from long-term gains and losses. All short-term gains must be reconciled to yield a total short-term gain. Short-term losses are then aggregated. Finally, calculate long-term gains and losses.
Short-term gains are offset against short-term losses to produce a net short-term gain or loss. The same goes for long-term gains and losses.
Most people calculate their taxes using software that does the calculations automatically (or have a professional do it for them).But you can use a Capital Gain Calculator Get a rough idea of how much you might pay for a potential or realized sale.
Capital Gains Tax Strategy
Capital gains tax effectively reduces the overall return generated by an investment. But for some investors, there is a legal way to reduce or even eliminate their net capital gains tax for the year.
The easiest strategy is to simply hold the asset for more than a year before selling it. This is sensible because you typically pay less tax on long-term capital gains than you pay on short-term gains.
1. Take advantage of your capital losses
Capital losses will offset capital gains and effectively reduce capital gains tax for the year. But what if the losses outweigh the gains?
There are two options. If your losses exceed your gains by up to $3,000, you can claim this amount based on your income. Losses are carried forward, so any excess losses not used during the current year can be deducted from income to reduce your tax liability in future years.
For example, suppose an investor makes a profit of $5,000 from the sale of some stocks, but loses $20,000 from the sale of others. Capital losses can be used to offset the tax liability for gains of $5,000. The remaining $15,000 in capital loss can be used to offset income, thereby offsetting taxes on those income.
So, an investor with an annual income of $50,000 can claim $50,000 in the first year minus the maximum annual claim of $3,000. This brings the total taxable income to $47,000.
The investor still has a capital loss of $12,000 and can deduct up to a maximum of $3,000 per year for the next four years.
2. Don’t break the wash rules
Be aware of selling shares at a loss for tax benefits, then turning around and buying the same investment again. If you do this in 30 days or less, you will be violating the IRS wash rules for this series of transactions.
Significant capital gains of any kind are reported on a Schedule D form.
Capital losses can be carried forward to subsequent years to reduce any future income and lower the taxpayer’s tax burden.
3. Use a tax-advantaged retirement plan
One of the many reasons to participate in a retirement plan such as a 401(k)s or IRA is that your investments grow year over year without paying capital gains tax. In other words, in a retirement plan, you can buy and sell each year without losing Uncle Sam’s share.
Most plans do not require participants to pay taxes on funds before withdrawing from the plan. That is, withdrawals are taxed as ordinary income regardless of the underlying investment.
The exception to this rule is a Roth IRA or Roth 401(k), which collects income tax when money is paid into the account, making qualified withdrawals tax-free.
4. Cash out after retirement
As you approach retirement, consider waiting until you actually stop working to sell profitable assets. If your retirement income is low, capital gains taxes may be reduced. You can even avoid paying capital gains tax altogether.
In short, be aware of the impact of taking a tax hit at work, not retirement. Recognizing the benefits earlier could put you out of the low- or unpaid class and cause you to incur a tax bill for the benefits.
5. Be aware of your holding period
Remember, the asset must be sold within one year of purchase in order for the sale to qualify as long-term capital gain. If you are selling a security that was purchased about a year ago, be sure to check the actual transaction date of the purchase before selling. Just wait a few days and you can avoid seeing it as a short-term capital gain.
Of course, these timings are more important for larger trades than smaller ones. The same applies if you are in a higher tax bracket than a lower tax bracket.
6. Choose your base
Most investors use a first-in, first-out (FIFO) method to calculate the cost basis when buying and selling shares of the same company or mutual fund at different times.
However, there are four other methods to choose from: last-in, first-out (LIFO), dollar value LIFO, average cost (for mutual fund shares only), and specific share identification.
The best choice will depend on several factors, such as the benchmark price of the shares or units purchased and the amount of earnings that will be announced. For complex cases, you may need to consult a tax advisor.
Calculating your cost base can be a tricky one. If you use an online broker, your statement will be on their website. Regardless, make sure you have some form of accurate records.
Finding out when and at what price a security was purchased can be a nightmare if you lose the original confirmation statement or other records at the time. This is especially troublesome if you need to accurately determine your gain or loss when you sell your stock, so be sure to keep track of your statements. You will need these dates on your Schedule D form.
When do you owe capital gains tax?
You are subject to capital gains tax in the year you realize the gain. For example, if you sold some stock at any time in 2022 and made a total profit of $140, you must report the $140 as capital gains on your tax return for that year.
Profits from the sale of most investments are subject to capital gains tax if held for at least one year. Taxes are reported on Schedule D form.
Capital gains tax rates are 0%, 15% or 20%, depending on your taxable income for the year. High earners pay more. Income levels are adjusted annually for inflation. (See table above for capital gains tax rates for tax years 2021 and 2022.)
If the investment is held for less than a year, the profits are considered short-term gains and taxed as ordinary income. For most people, this is a higher rate.
How to avoid capital gains tax?
If you want to invest and make a profit, you will owe capital gains tax on that profit. However, there are some perfectly legal ways to minimize your capital gains tax:
- Insist on investing for more than a year. Otherwise, the profits will be considered fixed income and you may pay more.
- Don’t forget that your investment losses can be deducted from your investment profits up to $3,000 per year. Some investors have used this fact to good effect. For example, they would sell a loser at the end of the year in order to use the loss to offset their gain for the year.
- If your losses exceed $3,000, you can carry the losses forward and deduct them from capital gains in future years.
- Track any qualifying expenses you incur while making or maintaining your investments. They will increase the cost base of the investment, thereby reducing their taxable profits.
What are the benefits of lowering the capital gains tax rate?
Proponents of low capital gains see saving money and investing it in stocks and bonds as a good incentive. Increased investment drives economic growth. Businesses have the funds to expand and innovate, creating more jobs.
They also noted that investors are using after-tax income to buy these assets. The money they use to buy stocks or bonds is already taxed as ordinary income, and adding capital gains tax is double taxation.
What are the disadvantages of lowering the capital gains tax rate?
Opponents of the low capital gains rate question the fairness of taxing passive income less than labor income. The low tax rate on stock gains shifts the tax burden onto working people.
They also argue that lower capital gains taxes mainly benefit tax avoidance industries. That is, instead of spending money on innovation, businesses keep it in low-tax assets.