Capital gains tax is a tax on the profits you make from selling assets. It is calculated as a percentage of the difference between the price you paid for the asset and the price you sold it for.
For example, if you bought a stock for $1,000 and later sold it for $2,000, your capital gain would be $1,000. Depending on your tax rate, you may owe a percentage of that gain to the government.
The amount of tax you pay on your capital gains depends on several factors, including your income, the type of asset you sold, and how long you held the asset before selling it.
Note that these income thresholds are subject to change each year. Also, there may be additional state taxes on capital gains depending on where you live. It’s always a good idea to consult with a tax professional for your situation.
There are two types of capital gain rates: short-term and long-term.
Short-term capital gains tax applies to assets you have held for less than one year. The tax rate for short-term capital gains is the same as your regular income tax rate, which can be as high as 37% for high-income earners.
Long-term capital gains tax applies to assets you have held for more than one year. The tax rate for long-term capital gains is lower than the short-term rate and is based on your income level. For most taxpayers, the long-term capital gains tax rate is either 0%, 15%, or 20%.
To determine your liability, you need to calculate your net capital gain for the year. This is the difference between your total capital gains and your total capital losses. If you have more losses than gains, you can use up to $3,000 of those losses to offset other income on your tax return.
If you sell an asset for less than you paid for it, it is known as a capital loss. Capital losses can be used to offset capital gains. For example, if you have a $1,000 capital gain and a $500 capital loss, your net capital gain is $500.
The long-term capital gains tax rate is based on your income level and filing status.
For the tax year 2022, the long-term capital gains tax rates are:
0% for individuals with taxable income up to $40,400 ($80,800 for married couples filing jointly)
15% for individuals with taxable income between $40,401 and $445,850 ($80,801 and $501,600 for married couples filing jointly)
20% for individuals with taxable income over $445,850 ($501,600 for married couples filing jointly)
Limitations on capital tax losses
If you have more capital losses than capital gains, you can use up to $3,000 of those losses to offset other income on your tax return. If you have more than $3,000 in capital losses, you can carry over the excess losses to future tax years.
It is important to keep good records of your capital gains and losses. When you sell an asset, you should keep track of the purchase price. The sale price, and any expenses related to the sale, such as commissions or fees is needed. Typically, brokerage statements contain this information.
In addition to tax liability, there are also special rules for certain types of assets, such as real estate or cryptocurrency. For example, if you sell your primary residence, you may be able to exclude up to $250,000 in capital gains ($500,000 for married couples) from taxation.
In summary, the tax on the profit you make from selling an asset. The amount of tax you pay depends on several factors. Your income level, the type of asset you sold, and how long you held the asset before selling it. Keeping good records and understanding the tax rules can help you minimize your tax liability and maximize your after-tax returns.