Tax seasoncan feel like a minefield for new and old filersalike. Whether you work with a professional or file on your own, landing on the exactnumberamount you owe Uncle Sam (and vice versa) requires tireless calculation.
An important part of this calculus is the capital gains tax – a government levy on profits reaped from investments. It applies to everything from your stock portfolio to your jewelry drawer.
Here's what you should know about the capital gainstax, including the2024 rates and thedifferencebetween short-term and long-term profits.
What is capital gains tax?
Let's start at the beginning. What are capital gains? They refer to any profit you make from buying an asset at one price and selling itat a higher price.
All capital gains, like other profits, are subject to taxes. But there are caveats. For example, if you have a stock with a share price of $100 and it rises to $200− that is a 'capital gain' but not one that you will be taxed onunlessyou 'close your position,' meaning you sell that stock for the cash value.
Once you sell the stock and realize the actual capital gain (in this case $100), you can be taxed on that difference.
Long-term capital gains vs. short-term
A short-term capital gains tax is levied on the profits of investments that were sold after being held for a year or less. They are taxed at the same rate as your income. The IRS'stax bracketsdetermine the tax you pay for each portion of your income.
Long-term capital gains tax is applied to investments that have been held for over a year before they were sold for a profit. Long-term capital gains are generally taxed at a lowerrate. For the 2024 tax year, the highest possible rate is 20%.
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What qualifies for capital gains tax?
Capital gains taxes are not exclusive to the stock market. Anything considered a "capital asset" is subject to the tax. Essentially, any investment made that could appreciate and create a profit is fair play.
Capital gainstax applies to:
- Real estate
- Bonds
- Mutual funds
- NFTs/cryptocurrency
- Jewelry/coin collections
What is the 2024 capital gains tax rate?
The amount you will be taxedon capital gains depends on how long you have held a certain capital asset (long-term vs. short-term) and your income (what tax bracket you fall in.)
For short-term gains,you can follow the regular guidefor income tax to see how much you will pay for profits.
The long-term capital gains tax rates for the 2023 and 2024 tax years are 0%, 15%, or 20%. The higher your income, the more you will have to pay in capital gains taxes.
The rate is 0% for:
- Unmarried individuals filing separately with a taxable income less than or equal to$47,025.
- Married filing jointlywith a taxable income less thanor equal to $94,050.
- Head of household with ataxable income less than or equal to$63,000.
The rate is 15% for:
- Unmarried individuals filingwith a taxable income between $47,025 and$518,900.
- Married filing separately with a taxable income between $94,050 and$583,750.
- Head of household with ataxable income between$63,000 and$551,350.
The rate is 20% for
- Anyone whose taxable income is above the 15% threshold in their category.
Contributing: Olivia Munson
FAQs
How do capital gains taxes work? Capital gains can be subject to either short-term tax rates or long-term tax rates. Short-term capital gains are taxed according to ordinary income tax brackets, which range from 10% to 37%. Long-term capital gains are taxed at 0%, 15%, or 20%.
What is long term capital gains tax vs short-term? ›
Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
What is the long term capital gains tax rate for 2024? ›
For the 2024 tax year, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or less. The rate jumps to 15 percent on capital gains, if their income is $47,026 to $518,900. Above that income level the rate climbs to 20 percent.
How do you explain capital gains tax? ›
What Are Capital Gain Taxes? Capital gain taxes are taxes imposed on the profit of the sale of an asset. The capital gains tax rate will vary by taxpayer based on the holding period of the asset, the taxpayer's income level, and the nature of the asset that was sold.
What is the capital gains tax for people over 65? ›
The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.
At what age do you not pay capital gains? ›
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
How do I avoid capital gains tax? ›
Use tax-advantaged accounts
Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account. You'll just pay income taxes when you withdraw money from the account.
How do I calculate my capital gains tax? ›
Capital gain calculation in four steps
- Determine your basis. ...
- Determine your realized amount. ...
- Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. ...
- Review the descriptions in the section below to know which tax rate may apply to your capital gains.
If you sell a house or property in one year or less after owning it, the short-term capital gains is taxed as ordinary income, which could be as high as 37 percent. Long-term capital gains for properties you owned for over a year are taxed at 0 percent, 15 percent or 20 percent depending on your income tax bracket.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
Exemptions on Long-Term Capital Gains Tax
Capital gains up to Rs 1 lakh per year are exempted from capital gains tax. Long-term capital gain tax rate on equity investments/shares will continue to be charged at 10% on the gains.
What is the lifetime capital gains exemption? ›
When you make a profit from selling a small business, a farm property or a fishing property, the lifetime capital gains exemption (LCGE) could spare you from paying taxes on all or part of the profit you've earned.
What are the income tax brackets for capital gains? ›
Long-term capital gains tax rates
| Capital GainsTax Rate | Taxable Income(Single) | Taxable Income(Married Filing Separate) |
|---|
| 0% | Up to $47,025 | Up to $47,025 |
| 15% | $47,026 to $518,900 | $47,026 to $291,850 |
| 20% | Over $518,900 | Over $291,850 |
Exemptions on Long-Term Capital Gains Tax
Capital gains up to Rs 1 lakh per year are exempted from capital gains tax. Long-term capital gain tax rate on equity investments/shares will continue to be charged at 10% on the gains.
How do you calculate long-term capital gains tax? ›
How to Calculate Long-Term Capital Gains Tax
- Determine your basis. The basis is generally the purchase price plus any commissions or fees you paid. ...
- Determine your realized amount. ...
- Subtract the basis (what you paid) from the realized amount (what you sold it for) to determine the difference. ...
- Determine your tax.
Losses on your investments are first used to offset capital gains of the same type. Short-term losses are first deducted against short-term gains, and long-term losses are first deducted against long-term gains.
