Selling an asset for a profit is a cause for celebration until, of course, you have to deal with taxes. The Internal Revenue Service views that profit as taxable income, and this amount needs to be reported as a capital gain on your federal income tax return.
When Do You Owe Capital Gains Tax?
In tax language, a capital gain is any net profit on the sale of stocks, bonds, antiques, boats, crypto assets, a house, land — any hard asset. The IRS definition of this property is pretty broad: “Almost everything you own and use for personal and investment purposes.” The federal taxing agency requires an accounting of the sale price and “basis,” or net purchase price, and in most cases will levy a tax on any gain.
Capital gains are taxable, with the tax rate depending on your income and the length of time you held the asset.
Short- and Long-Term Gains
An important distinction is “short-term” versus “long-term” gains. In tax parlance, a short-term gain means a profit on an asset you held for a year or less, while a long-term gain means you profited off the asset after holding it for more than a year.
Assets bought and sold within a year are subject to the short-term capital gains tax. The tax percentage on a short-term gain is the same as the rate that applies to your taxable income outside the gain.
If you’re single, for example, the following brackets are in effect in 2022 (for 2021 taxes):
- 10% on income of less than $9,950
- 12% on income between $9,951 and $40,525
- 22% on income between $40,526 and $86,375
- 24% on income between $86,376 and $164,925
- 32% on income between $164,926 and $209,425
- 35% on income between $209,425 and $523,600
- 37% on income of $526,601 or more.
The income bracket for each rate is different for married filers and those filing as married but separate.
Keep in mind that the percentage levied on taxable income doesn’t always correlate to the final rate of tax paid on everything you earn. That percentage is affected by credits, deductions, exemptions and other adjustments to income.
To encourage longer-term investments, the federal tax law sets three brackets that usually result in a lower tax rate on long-term capital gains.
For single filers:
- 0% for incomes up to $40,400
- 15% for incomes between $40,401 and $445,850
- 20% for incomes higher than $445,850.
For married taxpayers filing joint returns:
- 0% for incomes up to $80,800
- 15% for incomes between $80,801 and $501,600
- 20% for incomes above $501,600.
Other Forms for Capital Gains
Not all capital gains transactions are reported on Form 8949, which is for investments or the sale of a home. You would report the sale of business property on Form 4797, for instance, and income from an installment sale on Form 6252.
Schedule D is where the taxpayer totals all of these transactions, indicates a profit or loss and comes up with a net capital gain or loss. The final gain or loss amount is entered on Form 1040.
Good To Know
Capital gains is one of the tougher and more mistake-prone segments of tax preparation. However, many tax software packages will guide you through questions on your capital gains transactions, calculate the numbers and prepare the appropriate forms for mailing or e-filing with the IRS.
Taxpayers must report all capital gains transactions on the appropriate forms and schedules. Form 8949 lists the date of purchase and the basis on a list that’s as long as it needs to be. Figured into the numbers is the purchase price plus all commissions, fees, sale date and price.
You’ll have to separate the transactions into three lists based on these specifications:
- If the transaction was reported on Form 1099-B and the basis was reported to the IRS
- If the transaction was reported on 1099-B without a reported basis
- If the transaction was not reported.
There are separate pages for short- and long-term gains. If you have multiple transactions and the paperwork will be extensive, your broker or accountant may be able to provide a completed Form 8949.
Changes in Capital Gains Tax Rates
Use the right form for the year you’re reporting. Schedules change regularly, and the income brackets change each year to account for rising incomes. Also, the rate of capital gains taxes often floats up and down at the whim of Congress. The highest long-term rate was 35%, reached in 1979, while the last change was a bump from 15% to 20% in 2013.
Minimizing Capital Gains Taxes
There are several ways to keep down the tax bite from capital gains:
- When investing, stick to a long-term, buy-and-hold mindset.
- Place investable money in a tax-advantaged retirement or college savings account.
- Take losses on stagnant investments to offset any gains on successful ones.
- Use a robo-adviser, which draws on an account history to suggest smart tax and investing strategies.
Tax Accounting for Losses
Of course, not every asset sale results in a gain. If you sold an investment for less than you paid for it, you could apply that loss to offset gains. If you sold two stocks for a total profit of $10,000, for example, and another for a loss of $5,000, then your net capital gain would be $5,000. The capital gains tax applies to this net capital gains figure.
Also, if you have a year with a net loss on asset sales, the rules allow a deduction of the loss from your taxable income of up to $3,000. If your net losses were greater than $3,000, then any amount greater than $3,000 can be carried forward to a later year’s tax return.
FAQHere are the answers to some of the most frequently asked questions about capital gains taxes.
- Are there different capital gains rates for different items?
- Yes. As an example, there's a different rate for a gain on real estate attributable to depreciation or the lowering of property value that affects the original cost basis. Collectibles and antiques are subject to a rate of 28% for those in the higher tax brackets and 10%, 15% or 25% for those who fall into lower tax brackets.
- Are there state capital gains taxes?
- Most states levy their own capital gains taxes, with the highest rate in California at 13.3%. Residents of Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming pay no state capital gains taxes.
- What about commissions and fees?
- The IRS allows any costs associated with a sale to be added to your basis or subtracted from your gain.
- What about house sales?
- You may not owe capital gains tax, even if you made a profit on the sale. The IRS grants an exemption under certain conditions -- up to $250,000 for single filers or $500,000 for married filers -- on the sale of a personal residence.
- What about my home-based business?
- Capital gains tax doesn't apply to business items or inventory, whether or not they're sold for a profit. The sale of these items would be included in the profit or loss of your brick-and-mortar or online business.
Elizabeth Constantineau contributed to the reporting for this article.
Information is accurate as of June 6, 2022.