Capital gains tax: Updated for tax year 2021

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.

What is capital gains tax?

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:

• Short-term capital gains tax. If you make a profit on an asset held for one year or less, you’ll pay taxes equal to your ordinary income tax rate.
• Long-term capital gains tax. If you make a profit on an asset held for more than a year, you’ll pay 0%, 15% or 20% in taxes depending on your income and filing status.

How much is capital gains tax worth in 2021?

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:

Short-term capital gains tax rates for 2021

Long-term capital gains tax rates for 2021

Limits

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. Use your losses to offset your gains so you’ll only get taxed for your capital gains.

For 2021, 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, fill out the Capital Loss Carryover Worksheet on the IRS website to calculate how much loss you’re allowed 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.

How much was the capital gains tax worth in previous years?

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 2018–2020:

Short-term capital gains tax rates for 2020

Long-term capital gains tax rates for 2020

• Short-term capital gains tax rates for 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+

• Long-term capital gains tax rates for 2019

  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+

• Short-term capital gains tax rates for 2018

  Rate	Single	Married filing jointly	Head of household	Married filing separately	Trusts and estates
  10%	$0 to $9,525	$0 to $19,050	$0 to $13,600	$0 to $9,525	$0 to $2,550
  12%	$9,526 to $38,700	$19,051 to $77,400	$13,601 to $51,800	$9,526 to $38,700	—–
  22%	$38,701 to $82,500	$77,401 to $165,000	$51,801 to $82,500	$38,701 to $82,500	—–
  24%	$82,501 to $157,500	$165,001 to $315,000	$82,501 to $157,500	$82,501 to $157,500	$2,551 to $9,150
  32%	$157,501 to $200,000	$315,001 to $400,000	$157,501 to $200,000	$157,501 to $200,000	—–
  35%	$200,001 to $500,000	$400,001 to $600,000	$200,001 to $500,000	$200,001 to $300,000	$9,151 to $12,500
  37%	$500,001+	$600,001+	$500,001+	$300,001+	$12,501+

• Long-term capital gains tax rates for 2018

  Rate	Single	Married filing jointly	Head of household	Married filing separately	Trusts and estates
  0%	Up to $38,600	Up to $77,200	Up to $51,700	Up to $38,600	Up to $2,600
  15%	$38,601 to $425,800	$77,201 to $479,000	$51,701 to $452,400	$38,601 to $239,500	$2,601 to $12,700
  20%	$425,801+	$479,001+	$452,401+	$239,501+	$12,701+

Who qualifies for capital gains tax?

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.

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How to calculate your capital gains tax rate

Follow these steps below to calculate your capital gains tax rate:

1. Subtract the initial purchase price from the sales price to calculate your profit.
2. Calculate your adjusted gross income by subtracting 401(k) or IRA contributions and itemized deductions from your gross income.
3. Determine whether you’ll pay short-term or long-term capital gains taxes. If you’ve held the asset for one year or less, you’ll pay taxes equal to your ordinary income tax bracket. If you’ve held the asset for more than a year, use the chart above to find your bracket based on your filing status and income.
4. Apply the tax bracket percentage to your capital gains.

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.

What to watch out for

There are a few things to watch out for with the capital gains tax:

• There’s a 25% capital gains rate for some real estate. If you sold any depreciated real estate, the IRS may require you to pay a 25% capital gains tax to keep you from getting a double tax break.
• There’s a 28% capital gains rate for special assets. You may pay a 28% capital gains rate on one-half of any qualified small business stock held for more than five years. You may also be subject to this higher rate for collectibles items like art, antiques, stamps, coins and precious metals.

How to reduce capital gains taxes

Offset your capital gains tax by:

• Claiming capital losses on your tax return. Claim up to $3,000 a year in losses, which lowers your overall tax burden.
• Contributing to tax-advantaged retirement plans. Contributing to tax-deferred retirement plans lowers your tax bill now, while contributing to pre-taxed accounts allows you to make tax-free withdrawals later on.
• Holding on to an asset for more than a year. The long-term capital gains rate is much lower than the ordinary income tax brackets, so you’ll lower your tax bill by holding onto an asset for at least a year.

Bottom line

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.

Frequently asked questions

Who can claim head of household?
Claim head of household if you:

• Are single, divorced or legally separated.
• Paid over 50% of your household’s costs for the year
• Have at least one qualifying dependent who lived with you at least 50% of the year

A qualifying dependent is someone who is related to you and is under age 19 or under age 24 and enrolled as a full-time college student.

How do I avoid capital gains tax on property?
If you recently sold an investment or rental property, avoid capital gains tax by filling out a 1031 exchange and rolling your profit into a similar investment. You usually have 180 days to do this.

What are the ordinary income tax brackets for 2021?
The ordinary income and short-term capital gains rates are: