Written By : Terry Turner
Edited By : Savannah Hanson
This page features 5 Cited Research Articles
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How to Cite Annuity.org's Article

APA Turner, T. (2021, November 19). Capital Gains Tax. Annuity.org. Retrieved December 6, 2021, from https://www.annuity.org/personal-finance/taxes/capital-gains/

MLA Turner, Terry. "Capital Gains Tax." Annuity.org, 19 Nov 2021, https://www.annuity.org/personal-finance/taxes/capital-gains/.

Chicago Turner, Terry. "Capital Gains Tax." Annuity.org. Last modified November 19, 2021. https://www.annuity.org/personal-finance/taxes/capital-gains/.

Capital gains are the profits you make when you sell a stock, real estate or other taxable asset that increased in value while you owned it. The capital gains tax is based on that profit. The long-term capital gains tax rate is typically zero, 15 or 20 percent, depending on your tax bracket.

Capital gains taxes apply to the sale of stocks, real estate, mutual funds and other capital assets. The tax is based on the profit you made — the price you sold it for minus the price you paid — and how long you held onto the asset.

The long-term capital gains tax rate, for assets held for more than one year, depends upon your taxable income. Short-term capital gains rates are higher and are based on your income tax bracket.

What Is Capital Gains Tax?

A capital gains tax is a tax you pay on the profit made from selling an investment.

You don’t have to pay capital gains tax until you sell your investment. The tax paid covers the amount of profit — the capital gain — you made between the purchase price and sale price of the stock, real estate or other asset. When you sell, your gain (or loss) is referred to as “realized.” Conversely, unrealized gains and losses occur when you have yet to officially sell the investment.

How much you pay in taxes depends in part upon whether you made a short-term or long-term capital gain on your investment, and each is taxed in different ways.

Short-Term vs. Long-Term Capital Gains Taxes
Short-Term Capital Gain
Short-term capital gains tax rates apply to assets you sell in one year or less of owning them.
Long-Term Capital Gain
Long-term capital gains tax rates apply to assets you sell after one year of owning them.

Short-term capital gains are taxed as ordinary income, such as the income tax you pay on your salary, at your standard federal income tax rate. This tends to be a higher rate than for long-term capital gains taxes, which are based on defined tax brackets that are adjusted each year for inflation.

Capital Gains Tax Rates for 2021

The capital gains tax on most net gains is no more than 15 percent for most people. If your taxable income is less than $80,000, some or all of your net gain may even be taxed at zero percent.

As of 2021, the long-term capital gains tax is typically either zero, 15 or 20 percent, depending upon your tax bracket. This percentage will generally be less than your income tax rate.

2021 Long-Term Capital Gains Tax Rates Based on Taxable Incomes
CAPITAL GAINS TAX RATE
SINGLE
MARRIED FILING SEPARATELY
HEAD OF HOUSEHOLD
MARRIED FILING JOINTLY
0%
Up to $40,400
Up to $40,400
Up to $54,100
Up to $80,800
15%
$40,401 to $445,850
$40,401 to $250,800
$54,101 to $473,750
$80,801 to $501,600
20%
$445,851 and higher
$250,801 and higher
$473,751 and higher
$501,601 and higher

Source: Kiplinger

There are some exceptions to this “0-15-20 percent” rule which allow certain capital gains to be taxed at higher rates.

Higher Capital Gains Tax Rate Exceptions
  • Taxable portions of the sale of certain small business stocks are taxed at a 28 percent maximum rate.
  • Net capital gains from selling collectibles such as coins or art are taxed at a 28 percent maximum rate.
  • Certain portions of capital gains from specific real estate sales are taxed at a 25 percent maximum rate.

How Are Capital Gains Calculated?

Capital gains and losses are calculated by subtracting the amount you paid for an asset from the amount you sold it for.

Capital Gains Formula

If the selling price was lower than what you had paid for the asset originally, then it is a capital loss.

You can then use this amount to calculate your capital gains tax.

4 Steps to Calculate Your Capital Gains Tax
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You may also use an online capital gains tax calculator to estimate what your taxes might be. Most calculators you find online will only give you an estimate of your tax liability. It is recommended to consult with a professional tax advisor or tax software to arrive at your actual tax liability.

How to Reduce Your Capital Gains Tax Bill

There are several ways to legally reduce your capital gains tax bill, and much of the strategy has to do with timing.

Strategies to Reduce Your Capital Gains Tax Liability
Claim your losses.
You can deduct up to $3,000 in investment losses from your investment profits every year. If you’ve bought an investment that’s losing money, you can sell it before the end of the year to cut your tax bill.
Don't buy back losing investments.
If you sell a losing investment to take advantage of a tax deduction, don’t turn around and buy it right back after the first of the year. If you do that within 30 days of selling, you can be penalized by the IRS.
Invest in a retirement plan.
The money you invest in a 401(k), individual retirement account (IRA) or similar retirement plan is not subject to capital gains taxes after you retire.
Take advantage of retirement.
Wait until you retire to sell your profitable investments. If you have a lower income in retirement, it can lower your capital gains tax rate. If the rate is low enough, you may not have to pay any capital gains taxes at all.
Track your qualifying expenses.
Depending on your investing habits, some maintenance expenses may qualify as tax deductions. Keeping track of these qualified expenses can reduce your capital gains tax bill.
Wait more than one year.
If you sell your investment before you’ve held it for one year, the gain is counted as regular income and is taxed at a higher rate. Holding onto the asset for more than one year will let you take advantage of the lower capital gains tax rates. Talking with a professional tax advisor can help you take full advantage of strategies to legally reduce your capital gains tax bill. They can also help you maximize your tax advantages with the best approach for you and your overall personal finance strategy.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 19, 2021

5 Cited Research Articles

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  1. Internal Revenue Service. (2021, October 25). Topic No. 409 Capital Gains and Losses. Retrieved from https://www.irs.gov/taxtopics/tc409
  2. Internal Revenue Service. (2021, October 25). Topic No. 701 Sale of Your Home. Retrieved from https://www.irs.gov/taxtopics/tc701
  3. Mengle, R. (2021, June 15). What Are the Capital Gains Tax Rates for 2021 vs. 2020? Retrieved from https://www.kiplinger.com/taxes/capital-gains-tax/602224/capital-gains-tax-rates-for-2021-vs-2020
  4. U.S. Congressional Research Service. (2021, June 4). Tax Treatment of Capital Gains at Death. Retrieved from https://crsreports.congress.gov/product/pdf/IF/IF11812
  5. York, E. (2019, April 16). An Overview of Capital Gains Taxes. Retrieved from https://taxfoundation.org/capital-gains-taxes/