If you own a home, car, cryptocurrency, or shares of a company’s stock, you have capital assets. Selling these items for a profit could trigger a capital gains tax. As is standard with the U.S. tax system, the capital gains tax isn’t easily understood. Show
What are Short-Term vs Long-Term Capital Gains?Short-term capital gains and long-term capital gains refer to how long you owned an asset, and further, how much you’ll be taxed. Also known as the holding period, the clock starts ticking the day after you buy the asset and lasts up to, and including, the day you sell the asset. In the context of capital gains, short-term means 12 months or less and long-term means more than 12 months. What is a Capital Gains Tax?A capital gains tax applies to the net gain you receive from selling a capital asset. How much you pay depends mostly on these factors:
The Difference Between Long-Term and Short-Term Capital GainsThe big difference between long-term vs short-term capital gains is how they’re taxed. Short-term capital gains are taxed like other ordinary income, such as wages from a job. Your gains are simply added to your gross income and taxed according to your federal tax rate. Long-term capital gains are taxed separately at rates between 0% and 20%, though in a few instances they may be taxed at a higher rate. Any type of capital asset can result in a short- or long-term capital gain. Read More: Guide to Filing Your Taxes in 2022 Long-Term Capital Gains Tax RatesFollowing are the tax rates and income thresholds for long-term capital gains in the 2022 tax year. Long-term capital gains rates for 2022
Short-Term Capital Gains Tax RatesThe tax rates for short-term capital gains are the same rates that apply to ordinary income. Like long-term capital gains taxes, the income thresholds are also adjusted each year for inflation. Short-term capital gains rates for 2022
How to Calculate Capital Gains TaxFollow these steps to determine long-term capital gains tax.
Follow these steps to find short-term capital gains tax:
Example of Calculating Capital Gains TaxLet’s look at a real-world example of long-term capital gains tax for Jane, whose taxable income for 2022 is $50,000.
Read More: Guide to Tax-Loss Harvesting States That Don’t Tax Capital GainsWe’ve been discussing how capital gains are taxed at the federal level. While many states also tax capital gains according to a unique system, these nine states don’t tax income (including capital gains) at all:
How to Avoid Capital Gains TaxAvoiding or minimizing capital gains tax comes down to being proactive. The easiest way to lock to reduce your tax bill is to hold on to an asset for longer than a year. You can also reduce or eliminate capital gains tax through tax-loss harvesting, which is the process of selling underperforming investments and using the loss to offset gains. The remaining gain, if any, is the only amount subject to taxation. You can also avoid capital gains tax by investing in tax-advantaged retirement accounts and donating appreciated assets to charity. Read More: How to Avoid Capital Gains Tax Capital Gains ExceptionsNot all capital gains are taxed at the standard rates outlined in the tables above. Here are the exceptions:
Advantages of Long-Term Capital GainsMost people will enjoy a nice tax break if they can hold on to an asset for longer than a year. This doesn’t mean there isn’t a benefit to holding an investment short term. Of course, prices aren’t fixed. Our scenario is hypothetical, and it’s unlikely someone would be able to net the exact same gain (before taxes) on an asset at different points in time. The value of assets such as stocks or cryptocurrency can swing wildly. Some investors earn their keep by making calculated moves that require buying and selling frequently. Note that there’s also the issue of the net investment income tax (NIIT), which applies to short- and long-term capital gains. If your adjusted gross income exceeds $200,000 as a single filer or $250,000 as a joint filer, you could owe an additional 3.8% net investment income tax regardless of whether your gain is short or long term. The Bottom LineDifferentiating between short- and long-term investments is the first step to figuring your tax on capital gains. Remember that the tax applies to your net gain, so don’t forget to apply your capital losses. A tax professional or financial advisor can help you calculate your capital gains tax and implement strategies for minimizing or avoiding it in the future. Learn More About Personal Capital’s Financial Advisors Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC. How do I calculate shortIn case of short-term capital gain, capital gain = final sale price - (the cost of acquisition + house improvement cost + transfer cost).
What is the tax rate difference between short and long term capital gains?Short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains are taxed at only three rates: 0%, 15%, and 20%.
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