Four things you should know about capital gains taxes

When you sell an investment or other personal asset, the difference between your adjusted tax basis (generally the amount you bought it for, see below) and the amount you sell it for is usually a capital gain or loss, based on whether you made or lost money on the sale. The amount of tax you pay on the capital gain is generally based on how long you held it: If you held it more than a year, it’s generally considered long-term capital gain; if you held it one year or less, it’s generally considered short-term capital gain.

While taxes shouldn’t necessarily drive investment decisions, it’s still a good thing to keep in mind before you sell an investment or other asset, since long-term capital gains rates can be much lower than short-term capital gains rates (depending on your income and other factors).

This all applies to investments such as stocks and bonds. It also applies to other capital assets such as certain real estate and personal-use items like jewelry or household furnishings.

How do I calculate my capital gain?

To calculate your capital gain, you need to figure out your adjusted tax basis. Generally, an asset’s tax basis is its cost to the owner (purchase price plus generally any fees or commissions paid to acquire the asset, along with certain other amounts), but tax basis may be adjusted up or down, for example, if you make capital improvements to your home or claim depreciation deductions with respect to the property. If you received the asset as a gift, the rules are a bit different, and you generally need to know the donor’s adjusted basis at the time of the gift in order to determine your basis. Your basis in inherited property is usually, but not always, its fair market value at the time of death.

Next, determine the amount realized on the sale, which generally includes the sales price minus any fees or commissions paid (and may also include certain other amounts). If the amount realized is more than your adjusted basis, that is generally a capital gain. If your amount realized is less than your adjusted basis, that is generally a capital loss.

You should consult a qualified tax professional about how to compute your tax basis in light of your own facts and circumstances.

Why does it matter if I have a long-term or short-term capital gain?

The amount of tax you pay on your capital gain generally depends on how long you have held the asset before selling it (known as the holding period).

Under current law, long-term capital gains are generally taxed more favorably than other types of income, with U.S. federal graduated thresholds for taxable income at 0%, 15% or 20%.

Short-term capital gains, meanwhile, do not generally receive any special tax rate and are therefore taxed like ordinary income at graduated rates. That means you may possibly pay between 10% and 37% in U.S. federal income taxes for your short-term capital gains, depending on your tax bracket.

Some or all long-term capital gains might be taxed at 0% at the federal level if your taxable income is at or below certain thresholds (for example, $94,050 if married filing jointly).

Can I minimize my capital gains tax?

Because long-term capital gains are generally taxed at a more favorable rate than short-term capital gains, you can typically reduce your capital gains tax by waiting to sell the relevant assets until you’ve held them for more than one year.

Additionally, investing in tax-free or tax-deferred accounts, like a 401(k) or Roth IRA for retirement and 529 plan for college savings, could help minimize the amount of taxes you need to pay on the capital gains on your investments. It’s worth noting, however, that a tax-deferred account may not be appropriate for all types of investments.

Any additional rules to keep in mind?

One thing to keep in mind is that capital gains from the sale of certain collectible assets, like antiques, fine art, gems, coins and valuable vintages of wines, held more than one year, are generally taxed at a 28% rate.

You should also consider the Net Investment Income Tax, which adds a 3.8% surtax to certain net investments of individuals, estates and trusts above a set threshold. Typically, this surtax applies to high-income earners who also have a significant amount of capital gains from investment, interest or dividend income.

On the flip side, there are a few exceptions that can help you save money. If you have owned and used your home as your main residence for a total period of at least two years out of the five years prior to its sale, then you generally may be able to exclude up to $250,000 of capital gains on this type of real estate if you’re single and $500,000 if you’re married and filing jointly. Certain home improvements can also increase its tax basis. If you’re considering this exception, remember not to sell your home too quickly, and take note that you typically can only use this exemption once every two years.

Moreover, if you end up losing money from some of your investments, rather than generating gains, those capital losses can generally be used to reduce gains and, as a result, may minimize your taxes. For example, if you have $1,000 in long-term capital gains and $1,000 in long-term capital losses, you can typically net the two, which would result in no taxable long-term capital gains. If, after netting those gains and losses of the same type, you have a net loss, you may be able to use that net loss to offset net gains of the other type. Additionally, if you end up with a net capital loss after fully netting your gains and losses, an individual (unmarried) or married couple filing jointly can generally use up to $3,000 of those losses per year to reduce their other taxable income. Any additional net capital losses beyond that can generally be carried forward into future years. Note that losses from the sale of personal use property, such as your home or car, are generally not deductible for U.S. federal income tax purposes.

View Disclosures