Capital gains refer to the gains from the sale of assets, which may include stocks, bonds, mutual funds, jewelry, or a business. The tax rate on capital gains depends on how long you held the assets (less than a year or more than a year) and your income bracket.
Short-term capital gains vs Long-term capital gains tax
Short-term capital gains tax refers to a tax on the sale of assets held for 1 year or less, whereas long term capital gains tax refers to tax on assets held for more than 1 year.
Long-term capital gains
Long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status.
|Long term Capital Gains Tax Rate||Single Filers||Married Filing Jointly||Heads of Household||Married Filing Separately|
|15%||$41,675 to $459,750||$83,350 to $517,200||$55,800 to $488,500||$41,675 to $258,600|
|20%||Over $459,750||Over $517,200||Over $488,500||Over $258,600|
Short-term capital gains
The short-term capital gains tax rate is your ordinary income tax rate (your tax bracket) as shown in the table below.
|Qualified Dividend Tax Rate||Single Filers||Married Filing Jointly||Heads of Household||Married Filing Separately|
|10%||$0 to $10,275||$0-$20,550||$0-$14,650||$0-$10,275|
Tax laws are complicated. Here are a few exceptions to the tax rates discussed above.
Net investment income tax
An additional 3.8% tax may apply to some people. The additional tax is applied to the smaller of your net investment income or the amount by which your adjusted gross income (AGI) exceeds the amounts below.
- Single or head of household: $200,000
- Married, filing jointly: $250,000
- Married, filing separately: $125,00
If you sell a home, you can exclude up to $250,000 in gains from taxes if you are single. That amount goes up to $500,000 if you married. To qualify, you must have owned and used your home as your primary residence for at least two years in the 5-year period before you sell it. You should also not have excluded another home from capital gains in the 2-year period.
How to reduce your capital gains taxes
Increase your holding period
The tax rates of long-term capital gains are much lower than short-term capital gains. If you hold your stocks longer than 12 months, you will pay less in taxes.
Carry Over Losses
If you don’t have enough capital gains to offset your losses, tax laws allow you to carry the excess into subsequent years. There is a limit to how much you can deduct per year, but tax-loss carryover will reduce taxes.
Increase your investment in tax-advantaged accounts
Investing more in tax-advantaged accounts such as the 401(k) will defer your taxes until you withdraw from the account (you will pay ordinary income taxes upon withdrawal). With Roth IRA, you invest with after-tax money, and won’t pay any taxes when you withdraw money.