Have you wanted to dive into investing but been too nervous to get started? The investing world is full of jargon that sounds like a foreign language, and you may be telling yourself that you don’t know enough to jump in. But don’t let confusion hold you back, get educated.
That fear could be one reason that nearly half of Americans don’t invest in the stock market, a share that falls to less than a third for adults younger than 30. But those who stay out of the market miss out on the chance to grow their money over the long haul. The longer you’re invested, the more likely you are to weather any potential downturns and see long-term gains. Putting your money to work in the market is an essential tool for saving toward retirement and other long-term goals.
Knowing the basics about investing does start you off on the right foot, but entering the market doesn’t have to be intimidating. You just have to get acquainted with some fundamental terms and concepts. One thing you need to know about is capital gains taxes. Don’t worry—it’s not too complicated. Here’s some basics about the capital gains tax rate:
What Are Capital Gains Taxes?
The capital gains tax is a tax you pay on profits from selling certain kinds of investments, including stocks, bonds, properties, cars, or a business. The tax is not applied for owning these assets—it only hits when you profit from selling them.
That profit is called a “capital gain.” Selling your home is usually exempt from capital gains tax (up to $250,000 in profits for an individual), as long you meet certain criteria, including having used it as your primary residence for at least two of the past five years.
In the U.S., you pay taxes on net capital gains, or the difference between what you earned and what you lost in selling these assets. For example, if you sell certain stocks for a profit, and sell others at an equal loss, your capital gains would be $0, and you wouldn’t pay any taxes.
Short-Term vs Long-Term Capital Gains Tax?
When you sell an asset after owning it for a year or less, it’s considered a short-term capital gain. If you sell it after owning it for at least a year, it’s a long-term gain. The tax rate is significantly higher for short-term gains compared to long-term gains. It’s often recommended to keep an asset for a year or longer before selling it to take advantage of the lower tax rates.
The short-term capital gains tax is taxed as regular income-and the taxes are based on your tax bracket. For example, if you file individually, the capital gains tax rate is 12% if you make $9,526 to $38,700, 22% if you make $38,701 to $82,500, 24% if you make $82,501 to $157,500, and 32% if you make $157,501 to $200,000 (it continues to go up from there).
If you’re married filing jointly, the short-term capital gains tax rate is 12% if you make $19,051 to $77,400, 22% if you make $77,401 to $165,000, 24% if you make $165,001 to $315,000, and 32% if you make $315,001 to $400,000.
The long-term capital gains rate for an individual, on the other hand, is 0% for anyone making less than $38,600, 15% for anyone making $38,601 to $425,800, and 20% above that.
If you’re married filing jointly, the rate is 0% for couples making less than $77,200, 15% for couples making $77,201 to $479,000, and 20% for couples making more than $479,000. Keep in mind that there are exceptions. For example, capital gains from selling collectibles such as coins and fine art are taxed at 28%.
What Were Capital Gains Taxes Historically?
The short-term capital gains tax rate has shifted along with changes in ordinary income tax rates. Tax rates have generally gone down in 2018 thanks to the Tax Cuts and Jobs Act, passed in December 2017.
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 20% dates back to 2012. Back in the 1970s, the maximum rate was at a high of 35%.
From about 1986 to 1997, maximum rates were also pretty high at around 28%. From the early 1940s to the late 1960s, the rate was around 25%. But we’ve also had rates that were lower than today’s. For example, back in the 1920s, the maximum rate was around 12%. And between 2004 and 2012, it was just 15%.
The 2017 tax plan did not touch capital gains tax rates. But the Trump administration has said that it’s considering new reforms to the capital gains tax, including lowering rates and indexing them to inflation.
That would mean people would only pay taxes on gains that are higher than the rate of inflation. The change, if it goes through, is expected to mostly benefit people with high incomes .
An accountant or financial advisor can suggest ways to lower your capital gains taxes. One way might be to think about opening a retirement account, such as 401(k) plans, IRAs, and 529 college savings accounts since you don’t have to pay capital gains taxes when you sell stocks or bonds in these accounts.
Investing with SoFi Invest®
If you’re hesitant to start investing, one great way to get started is with an account that offers investing advice. When you open an account with SoFi Invest, you’ll gain access to a team of financial advisors who can help you set goals and determine your risk tolerance.
You’ll also benefit from the best of automated investing technology and the automatic rebalancing of your portfolio as the market changes. Investing is easy with SoFi and you can begin investing with an initial investment of just $100.
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