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Before you file your taxes, understand how capital gains taxes work, how they’re calculated and what you can do to lower your tax bill.
Capital gains tax is a tax you pay on the profit you make when you sell an asset.
For example, if you buy 50 shares of stock worth $100 each, then sell all 50 shares when they’re worth $150, you’d pay capital gains taxes on the $50 difference — $2,500 in total.
There are two different types of capital gains taxes:
The short-term capital gains rate is equal to your ordinary income tax bracket. Long-term rates vary depending on your income and filing status:
Rate | Single | Married filing jointly | Head of household | Married filing separately | Trusts and estates |
---|---|---|---|---|---|
10% | $0 to $9,875 | $0 to $19,750 | $0 to $14,100 | $0 to $9,875 | $0 to $2,600 |
12% | $9,876 to $40,125 | $19,751 to $80,250 | $14,101 to $53,700 | $9,876 to $40,125 | —– |
22% | $40,126 to $85,525 | $80,251 to 171,050 | $53,701 to $85,500 | $40,126 to $85,525 | —– |
24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,501 to $163,300 | $85,526 to $163,3005 | $2,601 to $9,450 |
32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 | $163,301 to $207,350 | —– |
35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $518,400 | $207,351 to $311,025 | $9,451 to $12,950 |
37% | $518,401+ | $622,051+ | $518,401+ | $306,176+ | $12,951+ |
Rate | Single | Married filing jointly | Head of household | Married filing separately | Trusts and estates |
---|---|---|---|---|---|
0% | $0 to $40,000 | $0 to $80,000 | $0 to $53,600 | $0 to $40,000 | $0 to $2,650 |
15% | $40,001 to $441,450 | $80,001 to $496,600 | $53,601 to $469,050 | $40,001 to $248,300 | $2,651 to $13,150 |
20% | $441,451+ | $496,601+ | $469,051+ | $248,301+ | $13,151+ |
While there are no limits to the capital gains tax, there are limitations for capital losses, also known as net capital gains. Capital losses are losses you incur after selling an asset for less than you purchased it. You can use your losses to offset your gains, so you’ll only get taxed for your capital gains.
For 2020, if your losses are more than your capital gains you can deduct up to $3,000 — or $1,500 if you’re married and filing separately. If your capital losses exceed this limit, you can fill out the Capital Loss Carryover Worksheet on the IRS website to calculate how much loss you can carry over to future years.
Also, if you claim a loss you can’t buy back the asset within the first 30 days after you’ve sold it. If you buy it back within this timeframe you can’t claim the loss. This is called the wash sale rule.
While the capital gains tax brackets remained at 0%, 15% and 20%, the income limits have shifted over the past three years due to the Tax Cuts and Jobs Act. Here are the short- and long-term capital gains tax rates for 2017–2019:
Rate | Single | Married filing jointly | Head of household | Married filing separately | Trusts and estates |
---|---|---|---|---|---|
10% | $0 to $9,700 | $0 to $19,400 | $0 to $13,850 | $0 to $9,700 | $0 to $2,600 |
12% | $9,701 to $39,475 | $19,401 to $78,950 | $13,851 to $52,850 | $9,701 to $39,475 | —– |
22% | $39,476 to $84,200 | $78,951 to $168,400 | $52,851 to $84,200 | $39,476 to $84,200 | —– |
24% | $84,201 to $160,725 | $168,401 to $321,450 | $84,201 to $160,700 | $84,201 to $160,725 | $2,601 to $9,300 |
32% | $160,726 to $204,100 | $321,451 to $408,200 | $160,701 to $204,100 | $160,726 to $204,100 | —– |
35% | $204,101 to $510,300 | $408,201 to $612,350 | $204,101 to $510,300 | $204,101 to $306,175 | $9,301 to $12,750 |
37% | $510,301+ | $612,351+ | $510,301+ | $306,176+ | $12,751+ |
Rate | Single | Married filing jointly | Head of household | Married filing separately | Trusts and estates |
---|---|---|---|---|---|
0% | Up to $39,375 | Up to $78,750 | Up to $52,750 | Up to $39,375 | Up to $2,650 |
15% | $39,376 to $434,550 | $78,751 to $488,850 | $52,751 to $461,700 | $39,376 to $244,425 | $2,651 to $12,950 |
20% | $434,551+ | $488,851+ | $461,701+ | $244,426+ | $12,951+ |
If you’ve sold an asset for profit this year, it may be subject to capital gains taxes. Some popular assets include:
Note that the capital gains tax doesn’t apply to business inventory, business property and intangible assets like copyrights and patents.
Follow these steps below to calculate your capital gains tax rate:
Let’s look at an example.
Katie bought a rental property for $200,000 and sold it three years later for $250,000, so she’ll pay long-term capital gains taxes on the $50,000 profit. She’s single and her adjusted gross income falls under the 15% tax bracket, so she’ll pay $7,500 to the IRS.
There are a few things to watch out for with the capital gains tax:
You can offset your capital gains tax by:
If you’ve sold any investments or property this year, there’s a good chance you’ll pay capital gains taxes. Calculating this rate may seem daunting, but most tax preparation software packages will do it for you when you file your taxes.
If you’re looking to make this tax season a breeze, consider hiring a professional or using a top-rated online service to file your tax return.
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