Capital gains occur when you sell an investment or asset for more than you paid for it. The gain is the difference between the purchase price (or "basis") and the selling price. Capital gains can apply to investments like stocks, bonds, mutual funds, and real estate, as well as personal property like collectibles or artwork.
Profits from assets held for one year or less before being sold. Short-term capital gains are taxed as ordinary income at your regular income tax rate, which can be as high as 37% depending on your income bracket.
Profits from assets held for more than one year before being sold. Long-term capital gains receive preferential tax treatment with lower tax rates: 0%, 15%, or 20%, depending on your income level. Some high-income taxpayers may also pay an additional 3.8% Net Investment Income Tax.
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $44,625 | $44,626 - $492,300 | Over $492,300 |
| Married Filing Jointly | Up to $89,250 | $89,251 - $553,850 | Over $553,850 |
| Head of Household | Up to $59,750 | $59,751 - $523,050 | Over $523,050 |
Special types of capital gains may be taxed differently:
To calculate a capital gain, you subtract the asset's cost basis from its selling price:
Capital Gain = Selling Price - Cost Basis
The cost basis includes:
When you sell an asset for less than its cost basis, you incur a capital loss. Capital losses can offset capital gains, reducing your tax liability. If your total capital losses exceed your total capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) of the excess loss against other income. Any remaining loss can be carried forward to future tax years.
Tax-loss harvesting is the strategic selling of investments at a loss to offset capital gains. This technique can help reduce your tax bill while maintaining your overall investment strategy.
By holding investments for more than a year, you qualify for the lower long-term capital gains tax rates.
Selling investments that have declined in value to offset capital gains from other investments, thus reducing your tax liability.
Investments in retirement accounts like 401(k)s, IRAs, and Roth IRAs grow without generating taxable capital gains. Roth accounts can even provide tax-free withdrawals in retirement.
Gifting appreciated assets to family members in lower tax brackets or to charitable organizations can reduce capital gains tax exposure.
Assets that are inherited receive a "step-up" in basis to their fair market value at the time of the owner's death, potentially eliminating capital gains that accrued during the deceased's lifetime.
Capital gains and losses are reported on Schedule D of Form 1040. Your financial institutions will typically provide Form 1099-B showing your investment sales, which helps in calculating and reporting your gains or losses.
The IRS prohibits claiming a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale.
Mutual funds distribute capital gains to shareholders when they sell securities at a profit, even if you haven't sold your fund shares. These distributions are taxable unless held in a tax-advantaged account.