When do i owe capital gains tax

The capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

What is a capital gains tax?

A capital gains tax is a tax that investors pay on the profit from the sale of an asset. How much capital gains are taxed depends on how long the asset was held before selling, as well as taxable income and filing status.

Capital gains taxes apply to what the IRS calls "capital assets." This can include investments, such as stocks, bonds or cryptocurrency, real estate, cars, boats and other tangible items.

Your holding period — the time between the purchase of the asset and its sale — will help you determine how your profit will be classified for tax purposes. Assets held for a year or less before sale are considered short-term capital gains, while assets held for longer than a year are long-term capital gains.

What is short-term capital gains tax?

Short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals your ordinary income tax rate — your tax bracket. If you need a refresher on what tax bracket you’re in, review this rundown on federal tax brackets.

What is long-term capital gains tax?

Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year (also known as a long term investment). The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.

2022 capital gains tax rates

For taxes due in April 2023 or in October 2023 with an extension.

2022 capital gains tax calculator

» Looking for a way to defer capital gains taxes? Putting money in an IRA or a 401(k) could help postpone or even avoid future capital gains tax bills.

2023 capital gains tax rates

For taxes due in April 2024.

How capital gains taxes work

Only assets that have been "realized," or sold for profit, are subject to capital gains tax. This means that you won't incur taxes on any unsold, or "unrealized," investments that are, say, sitting in a brokerage account untouched. This is a good thing for long-term investors, as it allows an asset to grow in value over time without being taxed until the point of sale.

Holding on to an investment for a longer term can also have tax benefits once you cash out. That's because long-term capital gains tax rates, at 0%, 15% or 20%, are generally more favorable than short-term rates, which follow ordinary tax brackets.

• Capital gains taxes are also progressive, similar to income taxes.

• Taxes owed on capital gains are generally due for the tax year of the sale. For example, if you sell stock A for a $10,000 profit in 2022, be prepared to pay when you file in 2023.

• You can use investment capital losses to offset gains. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.

• The difference between your capital gains and your capital losses for the tax year is called a “net capital gain.” But if your losses exceed your gains, you have what's called a "net capital loss," and you can use it to offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.

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Watch out for two things

1. Rule exceptions. The capital gains tax rates in the tables above apply to most assets, but there are some noteworthy exceptions. Long-term capital gains on so-called “collectible assets” can be taxed at a maximum of 28%; these are things like coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate.

2. The net investment income tax. Some investors may owe an additional 3.8% that applies to whichever is smaller: Your net investment income or the amount by which your modified adjusted gross income exceeds the amounts listed below.

Here are the income thresholds that might make investors subject to this additional tax:

• Single or head of household: $200,000.

• Married, filing jointly: $250,000.

• Married, filing separately: $125,000.

• Qualifying widow(er) with dependent child: $250,000.

» Having trouble deciding whether and when to sell? A qualified financial advisor can help you understand your options. See some of our picks for the best financial advisors.

How to minimize or avoid capital gains taxes

1. Hold on

Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it's significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.

2. Use tax-advantaged accounts

These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts. Roth IRAs and 529 accounts in particular have big tax advantages. Qualified distributions from those are tax-free; in other words, you don’t pay any taxes on investment earnings. With traditional IRAs and 401(k)s, you’ll pay taxes when you take distributions from the accounts in retirement.

3. Rebalance with dividends

Rather than reinvest dividends in the investment that paid them, rebalance by putting that money into your underperforming investments. Typically, you'd rebalance by selling securities that are doing well and putting that money into those that are underperforming. But using dividends to invest in underperforming assets will allow you avoid selling strong performers — and thus avoid capital gains that would come from that sale.

4. Exclude home sales

To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.

5. Carry losses over

If your net capital loss exceeds the limit you can deduct for the year, the IRS allows you to carry the excess into the next year, deducting it on that year’s return.

6. Consider a robo-advisor

Robo-advisors manage your investments for you automatically, and they often employ smart tax strategies, including tax-loss harvesting, which involves selling losing investments to offset the gains from winners.

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