What Is Capital Gains Tax?
Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.
It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.
Here’s a guide on how to calculate stock profits, and below are some basic facts about capital gains taxes.
Capital Gains Tax Rates Today
Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.
When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.
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Short-Term Capital Gains Tax Rates (2021-2023)
The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.
The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.
Here’s a table that breaks down the short-term capital gains tax rates for the 2021–2022 tax year , or for tax returns that are filed in 2022.
|Marginal Rate||Income — Single||Married, filing jointly|
|0%||Up to $9,950||Up to $19,900|
|12%||$9,951 to $40,525||$19,901 to $81,050|
|22%||$40,526 to $86,375||$81,051 to $172,750|
|24%||$86,376 to $164,925||$172,751 to $329,850|
|32%||$164,926 to $209,425||$329,851 to $418,850|
|35%||$209,426 to $523,600||$418,851 to $628,300|
|37%||More than $523,600||More than $628,300|
Long-Term Capital Gains Tax Rate By Income (2021-2023)
Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.
The following table breaks down the long-term capital-gains tax rates for the 2021–2022 tax year by income and status.
|Capital Gains Tax Rate||Income — 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%||More than $445,850||More than $250,800||More than $473,750||More than $501,600|
An additional 3.8% may be applied to individuals who earn at least $200,000 or married couples making at least $250,000. This tax came into effect in 2013 to fund the U.S. health-insurance program, known commonly as Obamacare. A higher 28% is also applied to transactions involving art, antiques, stamps, wine and precious metals.
Tips For Lowering Capital Gains Taxes
Hanging onto an investment for more than a year can lower your capital gains taxes significantly.
Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes. Instead, 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.
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Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is twice that for a married couple.
For newbie investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.
How US Capital Gains Taxes Compare
Generally, capital gains tax rates affect the richest taxpayers, who make a bigger chunk of their income from profitable investments.
Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.
Compared to Other Taxes
The maximum long-term capital gains taxes rate of 23.8% is lower than the highest marginal rate of 37%.
Proponents of the lower long-term capital gains tax rates say the discrepancy exists to encourage investments as well as risk-taking. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.
Comparison to Capital Gains Taxes In Other Countries
In 2021, Bloomberg News reported that compared with capital gains taxes in other countries — like the 37 countries in the Organization for Economic Cooperation and Development (OECD) — the U.S.’ maximum rate of 23.8% is roughly midway on the spectrum of comparable capital gains taxes.
In comparison, in France the maximum rate is at 30%. Switzerland has no specific capital gains tax, but it taxes sales at the same rate as ordinary income.
Compared With Historical Capital Gains Tax Rates
Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.
As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 23.8% started in 2013, when the Obamacare 3.8% tax was added.
For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.
Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.
Tax Loss Harvesting
Tax loss harvesting is the strategy of purposely selling some investments at a loss to offset the taxable profits from another investment. It’s a way to delay paying taxes, not to eliminate paying them at all.
Using short-term losses to offset short-term gains is a good way to take advantage of tax loss harvesting — because, as we discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.
Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.
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Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.
It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital gains taxes.
An accountant or financial advisor can suggest ways to lower your capital gains taxes. When you open a SoFi Invest® brokerage account, you’ll gain access to a team of financial advisors who can help you set financial goals and determine your tolerance for risk. With as little as $1, investors can also sign up for a robo-advisor service that automatically builds and rebalances portfolios for members.
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