As an investor, it’s important to understand the taxes you may be subject to because of your investments. One of the more common taxes that investors pay is the capital gains tax. A capital gain is the increase or appreciation in an asset’s value and is realized when the capital asset is sold. When an asset is sold for a profit in a taxable account, capital gains tax is incurred.
Capital gains taxes can be a confusing and often unforeseen component of investing. To help make things simpler for you, we’ve created a capital gains calculator. This simple calculator can help you estimate how much you might owe in capital gains taxes so you’ll be prepared for tax season.
How to Calculate the Capital Gains Tax
A simple way to estimate your capital gains taxes is to use our capital gains calculator. Here’s how to use our tool to estimate how much capital gains tax you might owe:
- Enter your taxable income for the tax year in question. For both short-term and long-term capital gains, the rate you’ll pay is based largely on your income. We’ll talk more about that shortly.
- Enter your filing status for the tax year in question. It will be either single, married filing jointly, married filing separately, or head of household.
- Enter the price you paid for the asset in question. Your capital gain is calculated using your basis in the asset, which is usually your purchase price. Enter in your full purchase price. (Keep in mind, however, that capital gains are realized on a per-share basis when sold.)
- Enter the price at which you sold the same asset. Enter your full sale price.
- Indicate whether you held the asset for more or less than one year. This factor determines whether you pay short-term or long-term capital gains taxes, which also affects the rate you’ll pay.
What is the Capital Gains Tax Rate?
To talk about the different capital gains tax rates, we first must discuss the difference between short-term and long-term capital gains. The category your gains fall into will help determine how much you’ll pay in taxes.
Short-Term Capital Gains
A short-term capital gain occurs when you hold an asset for one year or less from purchase and then sell it for a profit. For example, suppose you bought 100 shares of stock for $25, and nine months later sold them for $30 each. Because you held the shares for less than one year, you would have incurred a short-term capital gain.
Short-term capital gains are generally taxed as ordinary income, meaning at a rate somewhere between 10% and 37%. The higher your household income, the higher your short-term capital gains rate.
Tax brackets change slightly from year to year as the cost of living increases. As a result, the short-term capital gains rates for 2022 look slightly different than those for 2021.
2022 Short-Term Capital Gains Tax Brackets
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||$0 to $10,275||$0 to $20,550||$0 to $10,275||$0 to $14,650|
|12%||$10,276 to $41,775||$20,551 to $83,550||$10,276 to $41,775||$14,651 to $55,900|
|22%||$41,776 to $89,075||$83,551 to $178,150||$41,776 to $89,075||$55,901 to $89,050|
|24%||$89,076 to $170,050||$178,151 to $340,100||$89,076 to $170,050||$89,051 to $170,050|
|32%||$170,051 to $215,950||$340,101 to $431,900||$170,051 to $215,950||$170,051 to $215,950|
|35%||$215,951 to $539,900||$431,901 to $647,850||$215,951 to $323,925||$215,951 to $539,900|
|37%||$539,901 or more||$647,851 or more||$323,926 or more||$539,901 or more|
Long-Term Capital Gains
A long-term capital gain occurs when you sell an asset at a profit that you’ve held for greater than one year. Going back to those 100 shares of stock in our previous example: if you held them for 13 months instead of selling them after nine months, your capital gain should be taxed at the preferential long-term capital gains rate.
Under current tax law, long-term capital gains have more favorable tax treatment. Rather than being taxed at your ordinary income rate, they are taxed at a rate of either 0%, 15%, or 20% depending on your household income.
2022 Long-Term Capital Gains Tax Brackets
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|0%||$0 to $41,675||$0 to $83,350||$0 to $1,675||$0 to $55,800|
|15%||$41,676 to $459,750||$83,351 to $517,200||$41,676 to $258,600||$55,801 to $488,500|
|20%||$459,751 or more||$517,201 or more||$258,601 or more||$488,501 or more|
Which Assets Qualify for the Capital Gains Tax?
Capital gains taxes can apply to any capital asset, which includes nearly everything you own for personal or investment purposes. Your home, furniture, vehicles, investment holdings, and other belongings are all capital assets. As a result, if you sell those assets for more than you bought them, you could be on the hook for capital gains taxes. However, the assets investors most often have to pay capital gains taxes on include investments like stocks, bonds, cryptocurrency, real estate, and more.
There are a few types of assets that are treated slightly differently for tax purposes. Perhaps one of the most important exceptions to the capital gains tax is your primary residence. Current tax law allows you to sell your home and exempt the first $250,000 of profit (or $500,000 for married couples) from the capital gains tax. In general, this exemption applies if you’ve lived in the home for at least two of the past five years, though it’s important to confirm eligibility requirements via the IRS site or with a tax advisor.
Other assets that have different tax treatment under the capital gains law include section 1202 small business stock, collectibles such as coins and art, and unrecaptured section 1250 gains from selling section 1250 property. Those assets are subject to a capital gains tax rate of 28%, 28%, and 25%, respectively.
How to Minimize Capital Gains Taxes
Though incurred because you’ve made money on your investments, capital gains taxes can be a frustrating expense when you’re trying to build wealth. Luckily, there are steps you can take to minimize capital gains taxes (or even avoid them).
Hold Assets More Than One Year
As we mentioned, assets held for less than one year are subject to short-term capital gains taxes, while those held for more than one year are subject to long-term capital gains taxes.
Currently, long-term capital gains have a more favorable tax treatment, with many taxpayers paying a rate of 0%, and even the highest earners paying a maximum rate of 20%. Meanwhile, the highest tax bracket for short-term capital gains taxes is 37%. As a result, one easy way to reduce your capital gains taxes is to hold investments for at least one year before you sell them.
Claim Investment Losses
It’s true that you have to claim realized capital gains on your taxes. But what you may not know is that you can also claim your investment losses to either offset your capital gains or claim a deduction.
Suppose you sold an asset for a profit of $3,000, and in the same tax year, sold another asset for a $3,000 loss. You can claim both the gain and the loss on your tax return, and because your loss offsets your gain, you shouldn’t incur any capital gains taxes.
If your capital losses in a year exceed your gains, you have two options. First, the IRS allows you to deduct up to the lesser of 3,000 ($1,500 if married filing separately) or your total net loss, which can then reduce your taxable income. If net capital losses are greater than the limit, you can choose to carry forward your losses to future years, which you can then use to offset future capital gains.
Personal Capital uses a strategy known as tax-loss harvesting to help offset our clients’ capital gains. Tax loss harvesting refers to the intentional selling of securities at a loss to turn an
unrealized loss into a realized loss. Capital losses can be used to offset capital gains, creating a tax-deferred benefit that can compound over time.
Invest in Tax-Advantaged Accounts
One of the reasons — and perhaps the primary reason — why retirement accounts like 401(k) plans and individual retirement accounts (IRAs) are so popular, is their tax advantages.
In the case of a traditional 401(k) or IRA, your contributions are either pre-tax or tax-deductible, and you won’t pay taxes on your investments if you can delay withdrawing the funds until age 59 ½. In the case of a Roth IRA or Roth 401(k), you contribute after-tax money, but then can withdraw funds tax-free in retirement. It’s important to keep in mind that the IRS imposes a 10% tax penalty on all non-qualifying withdrawals from retirement accounts.
In the case of both traditional and Roth retirement accounts, you won’t pay taxes on your investments while they remain in the account. That means when you buy and sell assets, you aren’t on the hook for capital gains taxes. For that reason, it may be worth holding some of your less tax-efficient investments in your retirement account(s).
Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.
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