Capital-gains taxes are taxes you pay on profits 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 several factors can affect their capital-gains tax rate: how long they hold onto an investment, which asset they’re selling, how much their annual income is, as well as their marital status.
Here’s a guide on how to calculate stock profits, and below are some basic facts to know 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 in taxes you pay.
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.
Recommended: Short-Term vs. Long-Term Investments
Short-Term Capital Gains Tax Rates
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 in order to adjust for inflation, so investors can learn them by searching on the Internet or talking to their 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%||Over $523,600||Over $628,300|
Long-Term Capital Gains Tax Rate By Income
Meanwhile, the long-term capital gains taxes for an individual are simpler and lower. These rates fall into three brackets: 0%, 15%, and 20%.
Here’s a table that 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%||Over $445,850||Over $250,800||Over $473,750||Over $501,600|
An additional 3.8% may be applied to individuals earning at least $200,000 or married couples making at least $250,000. This tax came into effect in 2013 in order 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 on Lowering Capital-Gains Taxes
Obviously, hanging onto an investment for over a year can significantly lower your capital-gains taxes.
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 529s are tax-free.
Recommended: Benefits of Using a 529 College Savings Plan
Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they have to live in for at least two of the past five years. The limit is twice that for a married couple.
It might also be helpful for newbie investors to know that up to $3,000 in losses from an investment can be used to deduct taxes on your income.
How U.S. 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, as well as investment taxes in other countries.
Comparison 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 in order to encourage investments as well as risk-taking. It may also prompt investors to sell their profitable investments more, rather than hanging on to them.
Comparison to Capital Gains Taxes In Other Countries
When compared with capital-gains taxes versus other countries, like the 37 in the Organization for Economic Cooperation and Development (OECD), Bloomberg News reported in 2021 that the maximum rate in the U.S. of 23.8% is roughly in the middle.
By comparison, in France, the maximum rate is at 30%. Meanwhile, Switzerland has no specific capital gains tax but taxes sales at ordinary income rates.
Comparison to Capital Gains Taxes Historically
Since short-term capital gains tax rates are the same as for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down due to 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, back 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 in the late 1980s and 1990s at around 28%. They then dropped between 2004 and 2012 to 15%.
What’s Tax Loss Harvesting?
Tax loss harvesting is that strategy of purposely selling some investments at a loss in order 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 the best way to take advantage of tax loss harvesting. This is since short-term gains are taxed at higher rates, as discussed above. 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 investment losses of up to $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.
Recommended: Is Automated Tax Loss Harvesting a Good Idea?
Capital-gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year in order 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 account, you’ll gain access to a team of financial advisors who can help you set financial goals and determine your risk tolerance. With as little as $1, investors can also sign-up for Automated Investing, a robo-advisor service that automatically builds and rebalances portfolios for Members.
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